Federal Estate Tax: What to Expect in 2013

August 26, 2012

Clients who are concerned about passing their wealth on to family members and other heirs have had plenty of reason for uncertainty in recent years. The federal estate tax scheme originally enacted a decade ago is set to expire at the end of 2012, with significant implications for existing estate plans.

Barring any action by members of Congress, the so-called "death" tax will rise from 35 percent to 55 percent at the end of this year. In addition, the current $5 million exclusion level will decrease to $1 million, meaning that an additional $4 million of the value of some estates will be subject to federal taxation.

Unexpected Implications of Changes in Estate Tax Exclusions

A recent case exemplifies the need to keep close tabs on one's estate plan due to estate tax changes. The case involved a strategy known to estate planning attorneys as a formula clause, which can be used to reserve the amount excluded by tax law for the children while designating the remainder of the estate to a marital trust for the surviving spouse.

When the estate tax lapsed in 2010 due to a political stalemate, the entire estate was theoretically excluded when the mother passed away. The children argued in a probate challenge that they were entitled to their mother's entire share of the marital estate valued at over $100 million, rather than dividing merely the excluded amount. The probate court agreed with the daughters that a last-minute change to the estate plan to remedy the problem, performed just days before the mother's death, was not properly carried out.

However, the court found that the trust instrument thwarted the mother's intent, because she had created the trust with the $1 million exclusion in mind. The daughters have announced that they will appeal, and the case is being watched closely by probate lawyers.

Revisiting Estate Planning Documents in Uncertain Times

The potential reduction of the federal estate tax rate and exclusion threshold is a very good reason to revisit or create an estate plan. A variety of innovative trust instruments can help clients preserve their legacy for future generations.

Article provided by Bryant Law Firm
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