As the dust settles around the new laws governing estate taxes, gift taxes and generation-skipping transfer taxes, here are five myths you need to know about the new laws:
The new laws end uncertainty about estate, gift and generation-skipping transfer taxes. This couldn’t be further from the truth. The new laws are only good for this year, after which the laws that were in effect back in 2001/2002 will be resurrected. On January 1, 2013, the estate tax exemption, lifetime gift tax exemption, and generation-skipping transfer tax exemption will each go from $5.12 million back down to $1 million. Will Congress intervene between now and January 1, 2013? Only time will tell.
Portability of the estate tax exemption between spouses will lead to the death of AB Trusts. In many cases, this new concept of portability of the estate tax exemption between spouses won’t make a bit of difference in a married couple’s estate plan. First and foremost, these new laws are only good for the remainder of this year, so no one knows for sure if portability will be available in 2013 and beyond. This means that both spouses will have to die in 2012 for portability to actually work. Aside from this, couples who are in a second or later marriage and have different final beneficiaries will still need to use the standard marital-family trust plan and items beyond the traditional garden-variety estate plan.
Gifting has become easier. This may or may not be true because it is unclear what will happen if the lifetime gift tax exemption goes from its current $5 million level back down to $1 million in 2013. Will large gifts made in 2012 get to benefit from the $4 million swing between the exemptions? Many practitioners don’t think that this “clawback” can happen, and yet 99% of practitioners didn’t see the current $5.12 million lifetime gift tax exemption as even a remote possibility. Making large gifts this year could be risky but still worth it.
You don’t need an estate plan. The new laws have everything to do with estate taxes, gift taxes, and generation-skipping transfer taxes, and absolutely nothing to do with planning for what happens if you become mentally incapacitated and after you die. So yes, you will still need an estate plan even if you don’t think that you’ll have an estate tax problem. But don’t forget about planning for state estate taxes which may still apply in some states.
Estate planning has become easier. Estate planning has become more difficult than ever. While estate plans need to be made flexible to deal with quickly changing laws, plans also need to be made rigid enough to meet clients’ estate planning goals. The days of planning for the happy couple who have been married for 40 years and have two well-adjusted kids and four darling grandchildren are long gone. Estate planners need to plan around ever-changing laws, as well as around dysfunctional families, non-traditional families, estranged families, and everything in between.
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Randall A. Denha, J.D, LL.M., is principal and founder of the law firm of Denha and Associates, PLLC with offices in Birmingham, MI and West Bloomfield, MI. He can be reached at (248) 265-4100 or by email at firstname.lastname@example.org