More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
For your clients who have been playing the wait-and-see game in estate planning this year, the time for waiting is over. Absent congressional action, the current $5.12 million exemption will revert to $1 million in less than three months, and the current 35% maximum estate tax rate will jump to 55%. While Congress could act to extend the 2012 rates, this appears less and less likely given today’s political landscape. And though a compromise provision could present a more reasonable solution, the opportunity for legislative compromise is quickly disappearing in this overheated political environment. The bottom line: the time for estate planning is now.
The Political Arena
The increasing difficulties in achieving a compromise on estate tax issues can be seen by examining the proposals presented by the 2012 presidential candidates. Mitt Romney would attempt to eliminate the estate tax entirely. President Obama’s proposal would reduce the exemption to $3.5 million but increase the maximum estate tax rate to 45%.
Further, the president has proposed inclusion of assets held in certain grantor trusts in calculating the gross estate. These assets are currently excluded from a decedent’s estate—and grantor trusts are frequently created specifically to reduce the value of assets included in the gross estate—therefore President Obama’s proposals would cause many more estates to exceed the exemption level.
The gap between the two candidates’ proposals illustrates the problem in reaching a compromise, but the landscape in Congress is even more troublesome. While we will not know who will win the presidential election for another month, the split in Congress is similarly pronounced, with widespread disagreement over the appropriate rates presenting a difficult hurdle for compromise.
The disagreement within Congress is evidenced by splits within the parties that have emerged in recent months. Many Democrats disagree with the increased estate tax rates and decreased exemption proposed by the president because of the anticipated impact on small business and farms. This has made it difficult to secure agreement even within a single political party in Congress.
Impact of Reversion
According to a LIMRA survey, more than one in eight U.S. households would end up owing estate taxes if the estate tax rates are permitted to revert to their 2001 rates in 2013. This is because, in addition to financial assets, assets such as real estate and life insurance are usually included in calculating the gross estate.
While the proceeds of life insurance on a decedent can be used to pay his estate tax liability, the LIMRA survey estimates that 55% of households would not have sufficient insurance coverage to pay the taxes owed if the estate tax rates revert to their 2001 levels. Each of these households would be left owing, on average, $1.6 million.
Although several months remain before we will have a conclusive answer to the 2013 estate tax question, now is the time for decisive planning. If your clients want to take advantage of the current high exemption, they should begin the planning process as soon as possible, and consider making gifts, as well as other moves that can be made before new law becomes effective.
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