The State of Estate Planning Post Fiscal Cliff

2013 is now three days old and we at Plainly Legal are pleased to report we have survived the "fiscal cliff" that loomed so ominously at year-end. While it took a few extra hours, some arm-twisting, and likely more than a few hurt feelings, Congress has managed a compromise and begun to address the expiration of tax cuts and mandatory spending reductions that make up the “fiscal cliff.” While the legislation passed by Congress is broad and addresses many different aspects of taxation, and Congress still needs to address a number of other areas in the next few months, I wanted to take just a few moments of your time to address impact of that legislation on the estate planning process.

The final legislation’s impact on the estate planning process is rather limited as compared to earlier proposed bills, but for the most part there is good news. The most important aspects of the bill are:

• The new law makes permanent the existing $5,000,000 exemption for each taxpayer for the Federal Estate Tax, and the law indexes this exemption to the rate of inflation so the exemption will grow slowly over time. This means that estates smaller than $5,000,000 ($10,000,000 for a married couple) are not subject to Federal Estate Taxation.
• The Lifetime Gift Tax Exemption for making gifts prior to death also remains at $5,000,000. The Lifetime Gift Tax Exemption and the Estate Tax Exemption remain linked, so every dollar of the Lifetime Gift Tax Exemption used counts against the Estate Tax Exemption.
• The legislation makes permanent the exemption portability, which is the ability of a widow or widower to make use of the unused exemption amount of a deceased spouse.
• The only substantive change in the legislation from the rules that governed for the past twelve months is an increase in the highest rate of estate taxation from 35% to 40%.

For better or worse, the legislation makes only limited changes to the law affecting estate planning. Plainly Legal will leave to others the political discourse and countless opinions expressed by elected officials, pundits, and others about the scope of the changes. Instead, we take solace in the fact that this legislation creates a level of certainty in the estate tax law that has not existed for the last few years. The certainty and permanency of exemptions and provisions that no longer have a sunset date (at least until Congress decides to actively make changes again) creates an opportunity to review a client's estate planning and determine whether it is appropriate to make any changes. With higher exemption limits, it may no longer be necessary for both a husband and wife to have a Living Trust, allowing planning simplification. In addition, concerns or issues which have been weighing on clients about family situations until the federal law was clearer can be addressed. It is also a good time to review your assets and confirm they are properly titled to avoid probate.

A Happy New Year from Plainly Legal

When I sat down to write this post around noon on December 31, I intended to use today to write about the current state of the law affecting estate planning. As you likely know, one part of the Fiscal Cliff is the expiration of the present law regarding the taxes paid on transfers of wealth at death, the Estate Tax. Tied to the Estate Tax is the Gift Tax, which taxes certain transfers of wealth during a person’s life. If Congress does nothing, when the present law expires the new threshold for estate taxation in 2013 will be $1,000,000. This means that estates with a value over $1,000,000 and lifetime gifting (with some exceptions) over $1,000,000 will be subject to taxation. The rate of taxation is also set to increase from a maximum rate of 35% of every dollar over the threshold to a maximum rate of 55% of every dollar over the threshold. This is just one of the results of the nation “going over” the Fiscal Cliff and I could spend a month of posts explaining those results.

However since as I was writing this post, Congress had not managed to find the collective moral courage to set aside partisan bickering, care more for the good of the nation than their own job security, and fulfill their oath to the American people, I find it difficult to articulate the state of the law. Ultimately, no matter what the law is as the sun rises over Washington, D.C. this New Year’s Day 2013, it can (and likely will) change. Tax rates and thresholds can be set retroactively, the difference between a tax increase and tax cut depends on the day of the week the law passes, and the nation’s economy will not split like the hull of the Titanic in the course of a single day or even a single month. Instead of a dry recitation of statutory interpretation I have for you three thoughts:

1. It is a new year. Take a moment to assess your goals from the past year, see how you did in achieving what you set out to do. Once you know where you came from, it is easier to plan for the future, so start achieving your 2013 goals today. Whatever else you do with the day is up to you, but I suggest spending it with friends and loved ones. There are 364 more days to spend making money, helping others, and fixing the dripping sink,  so why not start the year off with a little enjoyment.
2. Thank you for your trust and support. We have been writing this blog now for a little over three months and we intend to continue writing it for many more. Thank you for continuing to use us as counselors, advisors, and attorneys. It is our greatest pleasure to serve you, your families, and your clients. We truly appreciate it when we receive new clients through your referrals. If there are areas of estate planning, business planning, or other law that you would like to see us discuss here, please do not hesitate to let us know in the comments or by email.
3. Go team! As we go through the season of college football bowl games and NFL playoffs, may your team  score enough points to beat their opponent (or if you are so interested, just beat the spread).

A Happy and Successful New Year to you, your family, and everyone else in your life from everyone at Finkel Whitefield Selik and the Plainly Legal blog.

Al Ferrara

Matt Ferrara