Economic, legislative and regulatory events are keeping estate planners and their clients very busy in 2012. Persons who would like to discuss how these new developments affect their specific situations and existing estate plans should contact a member of the Estate Planning group of Vedder Price at +1 (312) 609 7500, or ask their main contact at Vedder Price to make an introduction.

The following is an executive summary of the most notable effects of the new developments. Additional information is available from Vedder Price upon request:  

  • Favorable Federal Estate Tax Rates, Exemptions Scheduled to Expire December 2012. The current favorable estate, gift and GST tax exemptions and rates, set forth in the chart below, are scheduled to expire on December 31, 2012. If Congress does not act before this time, these exemptions and rates will revert to their 2001 levels: rates will increase to 55% and exemptions will decrease to $1 million.  

A number of proposals suggest a variety of changes to these laws, including a proposal from the Obama administration, which would lower the estate tax and GST exemptions to $3.5 million and the gift tax exemption to $1 million. In any event, it seems unlikely that rates and exemptions will remain as favorable as they are currently.

Summary of Changes to Federal Transfer Tax Rates and Exemptions, 2010 Tax Act and under the President’s Proposals:

Click here to view the table.

Notes:

  1. In December 2011, the IRS announced that, after an inflation adjustment factor, the 2012 exemptions for gift, estate and GST taxes will be $5,120,000.
  2. Executors for decedents dying in 2010 may opt out of estate tax and into carryover basis.
  3. The GST exemption shown for 2013 is a projection, as it would be $1,000,000 indexed for inflation.
  • Using Lifetime Trusts to Lock in 2012’s Favorable Exemptions. As the expiration of the favorable estate, gift and GST tax exemptions is quickly approaching, persons with foresight are using lifetime irrevocable trusts to lock in these exemptions and prevent the significant loss of tax benefits.

Married individuals who wish to take advantage of the $5.12 million exemption, but still wish to retain access to these funds, should consider creating trusts in which one spouse is a beneficiary. This requires careful planning to avoid tax rules that would undo the benefits of the wealth transfer.

As these trusts may hold property for decades or longer, it is important that these trusts reflect the donor’s values and priorities. Designing the trusts around those goals takes time. In addition, transferring assets to these trusts can take days, if not weeks. Persons interested in taking advantage of these exemptions should contact a member of our Estate Planning group now to begin the process so that it can be completed before year-end.

  • Key Estate Planning Interest Rates at All-Time Lows. The IRS-calculated interest rates used in many estate planning techniques remain some of the lowest in the history of those rates. Many of these techniques are fairly simple and easy to implement. Donors should not let this opportunity pass them by. The combination of low interest rates, a $5.12 million gift tax exemption and depressed asset values has created the greatest estate planning opportunity of our lifetimes.