Yes You Can Plan for the Uncertainties of Tax Policy – Here’s How

Posted on

The Democratic and Republication primaries aren’t quite over, but Americans already know who will be leading the ticket for their parties. What we don’t know is what will happen to wealth transfer taxes after the election. On December 31, 2012, many of the current tax laws are set to expire, and it’s unlikely anything permanent will be done before the deadline. This ongoing cycle of patch and postpone has stopped many people from implementing beneficial wealth transfer strategies.It is difficult to make the case for making any significant changes to your estate plan when you don’t know what the future holds for taxes. What we do know is that there is a shrinking window available to take advantage of the current law to transfer significant wealth with little or no tax.

The current law for the individual estate, gift, and generation-skipping transfer (GST) tax exemption is $5.12 million. The top tax rate on amounts above the exemption amount is 35%. This is the highest exemption amount and lowest tax rate we have ever had during my lifetime. You would have to go to the period between 1916 and 1931 when the rate fluctuated between 10% and 40% to find lower tax rates. What is also unique about the current law is the portability of a spouse’s exemption. Essentially a married couple can transfer over $10 million of wealth free from estate tax.

Unless Congress acts to extend the current law, the exemption will drop to $1 million and the top tax rate will increase to 55%. Portability will also expire for married couples. Allowing the current estate laws to expire is expected to raise $68 billion in taxes. This amount of taxes has to look attractive to a government facing budget deficits in the trillions of dollars.

The Obama Administration gave us a sneak peak at what they might consider for the future of the estate tax when they released a general explanation of the proposed fiscal year 2013 budget. They would be in favor of returning the exemption to the 2009 level of $3.5 million. There was no guidance given on the rate of tax for estates exceeding this amount, but past debates on the topic indicate a rate between the current 35% level and the old 55% tax. The $3.5 million exemption would only apply at death. Lifetime gifts would no longer be linked to the estate and GST exemption but would be reduced to $1 million. Portability of the exemption however, would be made permanent.

Some proposed changes could have a negative impact on popular advanced estate planning strategies. One proposal would stipulate a 10-year minimum for grantor-retained annuity trusts (GRATs) and require that the remainder interest have a value greater than zero. Another proposal restricts the ability to discount the value of a minority interest in a business which has been a popular way of transferring a family owned business. The future of these proposals is unclear but it underscores the importance of reviewing estate plans under current law and implementing the techniques that make sense in your situation.

The concept of the New Three-Legged Stool™ strategy for retirement planning was developed to take advantage of current tax laws while planning for potential changes. Diversifying your retirement savings provides flexibility to change where your income will come from and whether it will be taxable. This permits the retiree to determine how much income tax they will pay each year based on the laws that are in effect. This same concept can be applied to estate planning.

High-net-worth individuals currently have an opportunity to take advantage of high estate, gift and GST exemptions, coupled with a low top transfer tax rate. We also know what transfer strategies work and Congress has a history of allowing these techniques to be grandfathered if they were put in place before the laws changed. They also have the chance to implement tax-minimization strategies that may not be available in 2013.

Given the lead time it takes to implement some of these strategies, it would be worthwhile to review your estate plan and goals to transfer wealth to the next generation. A game plan can be developed but implementation can be done over time. If tax laws change next year you will be glad you diversified by implementing at least part of the plan while tax laws were favorable.

Rick’s Insights

  • The current wealth transfer exemption is at an all-time high and the tax rate is the lowest since 1931. These rates expire on December 31, 2012.
  • You should diversify your estate plan in the same way retirement savings should be diversified to provide a degree of flexibility.
  • Congress has a history of grandfathering strategies that were implemented before a change in the tax code.

Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
how can you know for sure whether you’re on the right track?

Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

Get Personalized Answers
2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437