Do You Qualify for the Estate Tax Exemption?


It’s nice to be able to share some good news with you!  When I can put the word “down” in the same sentence with the word “tax”, I think that is a really good thing!  The federal estate tax impact has gone down.  The exemption amount, which is the amount of assets one can pass without a “death tax” being due to the IRS, was scheduled to be reduced to $1 million on January 1, 2013.  The American Taxpayer Relief Act, passed on January 1, 2013, did give relief in this area.  After about 12 years of uncertainty in our estate tax planning, there is actually some certainty, at least for the foreseeable future.

Will the estate tax affect you?  There is a good chance it will not.  In order to be “hit” with federal estate tax, you will need to die as a single person with over $5.25 million in your estate, doubling that amount for a couple (with some qualifiers.)  This amount does include all your assets, including retirement accounts and life insurance.   The only catch is that at the death of the first spouse, an estate tax form must be filed with the IRS in order to preserve any of the first-spouse-to-die’s exemption amount (the amount of the $5.25 million which was not used by the first spouse).  This amount is indexed for inflation as well.  The estimate is that about 99.7% of Americans will not have an estate tax due.  This is good news!

This good news means we can now focus on what we have always wanted to spend our time and energies on:  provisions in our Wills and Trusts that best provide and protect our spouse and our families.    Although we will not need to create complicated “credit shelter trusts” in our documents, we may still want to consider creating a trust for our surviving spouse.  A trust can perform many valuable functions.  A very effective way I often see a trust used is to protect assets from a “next” spouse.  Certainly, remarrying can be all good after the death of a spouse, but generally, most people want what they have accumulated during a marriage to go to the children of that marriage, not to a “next” spouse or to the “next spouse’s” children.  Further, many times a trust can be used to allow a surviving spouse or a child to be able to qualify for governmental assistance.  This is often called a Special Needs Trust.  Of course, we will continue to use the trust instrument to help raise our younger children.  (And by younger, I mean, a child less than about thirty-five!)  The Trustee, chosen by you, can give direction on how these funds will be used and what percentage will be distributed at the appropriate age.

The Will is still the only document that officially allows you to name the Guardian of your minor children.  The Guardian is the person who will actually “house” your minor child if both you and your spouse are deceased.

So…do you need to change the documents you have in place due to the change in the law?  Certainly this is a great time to pull out your documents and review exactly what you have in place.  If you have a credit shelter trust and your estate is not in “danger” of exceeding the $10 million mark (if you are married) or $5 million (if you are single), you may be able to simplify your documents.  It may be that you have a Co-Trustee on the credit shelter trust.    The Co-Trustee may be somewhat cumbersome and may not be needed due to the change in the law.

Reviewing your documents periodically, regardless of the change in the law is always a very good idea.  I suggest you look at your documents at least every year and that you and your attorney review your estate plan at least every 3-5 years.  The maxim your mother taught is still as true today as the day she taught you…never put off ‘til tomorrow what you can do today!



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