We’ve been hearing quite a bit about the “fiscal cliff.” But what does it mean and how does it impact your end of year estate planning?
The fiscal cliff is a phrase used to describe the end-of-2012 tax issues that the United States will be facing. Here’s the story: As of December 31, 2012, many tax cuts and tax breaks will expire. Some call it a “disaster waiting to happen.” According to CNN, it includes $7 trillion worth of tax increases and spending cuts over the course of a decade.
In the world of estate planning, the fiscal cliff refers to the gift and estate tax laws, which change drastically as of January 1, 2013. The estate tax scheme will essentially go back to what it was before 2001.
We've talked extensively about these changes on this blog. The current tax scheme allows for some pretty hefty tax incentives for the wealthy, when making gifts. Both the gift tax and the estate tax exemption amount are set at $5.12 million for this year. In addition, the tax rate on taxable estates will go up to 55%.
Let's look at some more numbers here. The exemption amount is predicted to go down to $1 million. That means that the number of estates subject to estate tax will go from an estimated 3,300 estates in 2012 to 52,500 in 2013, reports Marketwatch.
That's a huge increase in taxable estates. And a huge increase in tax dollars for Uncle Sam.
Many wealthy individuals are asking how they can take advantage of the current tax scheme before it's too late. But, the problem is that it might already be too late. Estate planning documents take some time to draft and gifting doesn't happen overnight.
And furthermore, just because the tax breaks could end, it doesn't mean that a gift of $5 million must be made. In many cases, it's just not practical for a family to gift away $5 million just to save on gift taxes down the line.
With only weeks left and uncertainty ahead, estate planners are swamped. But it never hurts to discuss these issues with your attorney.
- Search Directory of New York Estate Planning Lawyers (FindLaw)
- Beware of Formula Clauses and Estate Tax Uncertainty (FindLaw's New York Estate Planning News)
- Changes to Law May Eliminate Intentionally Defective