Creative Estate Planning for Clients No Longer Subject to the Federal Estate Tax

When Congress passed the American Taxpayer Relief Act (ATRA), roughly 99.8 percent of U.S. taxpayers became shielded from the federal estate tax (aka the “death tax”). So what does this mean for estate planning?

Post-ATRA estate planning appears dramatically different than in years past. For the first time in U.S. history there is a “permanent”, inflation-adjusted and portable exemption amount that essentially excludes the extremely wealthy, from gift, estate and generation-skipping transfer (GST) tax. This is extremely important since, for the past decade, there was a great deal of uncertainty in estate planning. Prior to ATRA, there had been a phased-in repeal of the gift, estate and GST taxes, a “sunset” of that same repeal, then a temporary two-year reinstatement of the taxes, but with a $5 million exemption and a 35% top rate. After the two-year temporary reinstatement, the exemption was set to drop all the way down to $1 million, with the top tax rate was set to increase to 55% (60% in some situations) after 2012.

Now, the ATRA made a permanent $5 million, per individual, exemption for the “big 3” taxes mentioned above – federal estate, gift and GST taxes. In addition, the ATRA permanently extended spousal portability which allows a surviving spouse to use the unused estate tax exemption of a deceased spouse to shelter lifetime gifts from gift tax, or they can pass the additional assets without incurring estate taxes.

So does the high, permanent threshold for federal transfer taxes lessen the need for an estate plan? I mean, the majority of your assets are now free from taxation so what’s the point of having an estate plan, right? Wrong.

Remember, the purpose of having a well-crafted estate plan is not just to reduce your tax liability. The goal is to safeguard your estate for important personal and business goals. This includes a variety of tools used for asset protection as well as options to ensure your legacy lives on.

This is where creative estate planning strategies come into play. In the post-ATRA estate planning world, the focus of estate planning can shift away from wealth transfer tax planning toward a focus on helping you and your loved ones meet important long-term financial security goals.

For creative ideas on maximizing and improving your estate plan, speak to an estate planning firm. Additionally, keep in mind numerous states still have a state estate tax, and there are other tax planning vehicles that can be utilized to help protect your assets in the future. With the new $5 million exemption and portability provisions allowed in the ATRA an estate planning attorney can help advise you on a variety of different strategies to help your strengthen your estate plan for the future.