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On October 20, 2011, the Internal Revenue Service recently announced that it intends to increase the estate and gift exclusion tax from $5,000,000 to $5,120,000—a 2.4% increase determined to keep pace with inflation. To estate planners, any increase in the exemption amount is a benefit to their clients. Indeed, the last decade has seen the estate tax exclusion increase from one million to five million dollars. However, in 2013 two developments will occur that could negatively impact estate plans:
– The exclusion limit returns from $5,120,000 to the 2002 level of $1,000,000.
– The estate tax rate increases from 35% to 55%.
How does this affect an estate? Currently if the value of your estate is $10 million dollars, $1.75 million would be paid in taxes this year. The same estate of $10 million in 2012 would pay $1.708 million (less taxes because of the higher exemption amount). However, if nothing is done to alter the current course and the increases sunset, allowing the estate to be taxed at rate of 55% with only a $1 million exemption, $4.95 million would be paid in taxes. That’s nearly three times what would occur if the estate were executed in 2011 or 2012.
Estate Taxes = (Estate Amount – Exemption Amount) X Tax Rate
Chances are good that some sort of compromise can be reached that would reduce the tax impact after the current exclusionary amounts and lower tax rate sunset. However, not knowing what the new exemption amount or tax rate on estates will presents a difficult challenge for estate planners. Except for rare instances, most people who develop an estate plan are unaware of the exact time when their testament will be executed. Furthermore, most people are planning their estates with the exception that they will survive beyond December 31, 2012. Yet without indications from the President, the IRS, or Congress, it’s impossible to know what, if any, estate tax relief will be available in the future.
Because of this, it may be necessary for estate planning attorneys to review plans with their clients to determine the best course of action—particularly as changes to the exclusion amount and tax rates are announced.
Hale Ball is can discuss the impact of the above changes in the estate tax law with you. Please feel free to call John Hale, Scott Pohlman or Craig Anderson, 703-501-4900 to discuss this further.