Year-End May Bring Huge Increases in Tax Impact Upon Death

Unless timely action is taken by U.S. Congress, individuals may see a drastic tax law change that will dramatically decrease the amount of assets that may pass to their heirs.

For many years, the tax exemption for estates was $600,000 with a tax rate of 55 percent for estates over that amount. The Economic Growth Tax Relief Reconciliation Act of 2001 gradually increased the exemption to $3.5 million by 2009 and, in 2010, the tax was completely eliminated.

Currently, the exemption stands at $5.12 million with a tax rate of 35 percent for estates over the exemption amount. Unfortunately, if Congress fails to act before the end of this year, the exemption will be reduced to $1 million and the tax rate will increase to 55 percent again. With more than 5 million households in the U.S. with net values of over $1 million, there is a lot hanging in the balance.

Some legislators want to get rid of the estate tax all together, some want to continue with the current exemptions and tax rate and others favor the $1 million exemption and higher tax rate. In the meantime, fearing the worst, many people are rushing to make changes to their estate plans.

Some ideas for possible changes include:

  • Providing tax-free gifts to heirs before the end of the year
  • Donating funds to charities or non-profit organizations
  • Creating an irrevocable living trust or irrevocable life insurance trust

One thing is for certain, doing nothing may be disastrous. Many people do not realize that death benefits from life insurance are also included in their taxable estates. A careful analysis of what may be included in your taxable estate is advised.

Source: The Record, "Neumann: Some looming changes in the estate tax law," Randy Neumann, August 17, 2012.

Our law firm handles large and small tax law and estate planning matters for individuals and businesses.

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