Estate Planning 2012: A Look Ahead

A new year has begun and it is already looking to be a very interesting year.  The upcoming national elections have once again been dubbed “the most important election ever” by the media and despite the hyperbole, there is no doubt that the upcoming election could potentially reshape the direction of our nation.

This is especially true for those of us in the estate planning world.  In late 2010, the president and Congress agreed to reinstate the estate tax with a $5 million exemption and a top tax rate of 35%.  This change came with a significant catch-the new exemption and rate would expire December 31, 2012 and absent an agreement prior to that date, the exemption would return to $1 million and a top rate of 55%.

Given the gridlock in Washington over the last twelve months and a national election that will likely worsen that gridlock, this massive change may become a reality come this time next year.  But, this is not the only possible change to look out for.  These additional issues bear watching throughout the next year:

Changes to the Federal Gift Tax:  For the last year, estate planners have noted the limited and significant opportunity for individuals to make large lifetime gifts while the gift tax exemption remained at $5 million.  There was some concern that the gift tax exemption would be reduced to produce revenue during the Super Committee negotiations, but nothing came of that (much like the negotiations themselves).  With an exemption now at $5.12 million, there remains an ever-decreasing window to make large lifetime gifts.

Interest Rates:  For individuals looking to sell assets to their relatives or to pass them on through vehicles like GRATs, the federal interest rates have remained at historically low rates.  There are indications that these rates may rise before the end of 2012, so this advantage may soon disappear.

Market Volatility: The current volatility in the stock market is another reason to consider vehicles such as GRATs.  Individuals can transfer assets to their relatives at a lower value than they will likely have over time.  This allows individuals to use a smaller portion of the lifetime gift tax exemption while providing their beneficiaries with a higher valued asset.

Changes to the Federal Income Tax: Along with the expiration of the current estate and gift tax rates and exemptions, absent action before December 31, 2012, the federal income tax rates will revert back to the rates that were in place prior to the Bush tax cuts.  Additionally, the President has proposed several changes to the income tax system that would reduce the use of the itemized deduction for wealthier Americans.  The Democrats in Congress have also suggested a surtax on individuals making more than $1 million a year.

Same Sex Marriage Laws:  Beyond taxes and asset values, changes to the legal status of same-sex couples remains an issue to watch with regard to estate planning.  The administration’s decision to stop defending the Defense of Marriage Act and the continued challenges to state bans on Same Sex Marriage (most notably, the lawsuit against Proposition 8 in California) may alter the way same sex couples plan their estates during the next 366 days.

It is likely that other factors will alter the way estate planners counsel our clients during 2012.  However, having seen the estate tax repeal and subsequent reinstatement during 2010, something no one ever imagined would happen, it would be crazy to predict what will actually happen this year.  The best you can do is sit back, watch and make sure your planning is up to date!

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