Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > Alternative Investments > Real Estate

The ticking estate tax time bomb: Less than 90 days of planning remain

Your article was successfully shared with the contacts you provided.

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.

See also: Obama vs. Romney: 6 key differences on taxes, regulation

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.

Even if the president’s compromise proposal is enacted, the LIMRA survey found that 53% of households affected by the tax would not have enough life insurance coverage to pay their estate tax liability. On average, each of these households would be left with an estate tax liability of $3 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.

For more on the estate tax, see:

Don’t let clients be blinded by the 2013 sunset: Tax planning now

LIMRA: More than 1 in 8 U.S. households may owe estate tax in 2013

Obama vs. Romney: 6 key differences on taxes, regulation


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.