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Foley & Pearson News

Monday, May 13, 2013

How Does the New Estate and Gift Tax Law Affect Your Planning?

Many of our clients have wondered how the new estate tax law affects their current estate plan.   The short answer is that the change in the tax law doesn't hurt anyone with a smaller estate and is certainly helpful for people with larger estates.

We often refer to the estate tax exemption as your "coupon."  Every American is allowed to pass the "coupon amount" to their heirs without paying any federal estate or gift taxes. The coupon has now been set at $5 million, indexed for inflation.  The law has no expiration date.  So how does this change affect existing plans?

Many of the living trust-based plans that we have implemented for our married clients in the past 10 years include planning that maximizes the amount of wealth that can pass to others upon the second death.  These plans provide that upon the death of the first spouse, the decedent's portion of the estate (up to the coupon amount in effect in the year of death) passes to an irrevocable trust we call the Family Trust. With a $5.25 million coupon this year, the first spouse could transfer up to $5.25 million to the Family Trust. But if a couple doesn't have $5 million, the Family Trust will simply be funded with less money. 

The Family Trust planning we have done takes into consideration that the coupon amount was increasing, but might also decrease. Therefore, if you have a Family Trust in your plan, flexible language provides for maximum funding of the Family Trust based upon the current coupon amount.

Some clients might ask whether they need a Family Trust any more as part of their estate plan after the death of the first spouse, if together they have less than a $5 million estate.  The answer to this question is, "It depends."  The Family Trust provides tax planning, but it also provides asset protection for the surviving spouse and protection that the wealth will not be given to the wrong people by the surviving spouse later on.  We call this bloodline protection.  We anticipate that most of our clients will probably keep the Family Trust as part of their estate plan, even if they no longer have a taxable estate.

Periodic plan review is included in our Generations Trust Maintenance Program.  If your circumstances have changed, or if you are not sure what your plan says and want to know exactly how the new law affects you, feel free to schedule an estate plan review with our office.

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