As you probably know, the American Taxpayer Relief Act of 2012 (2012 Tax Act) was passed by Congress and signed into law by the President earlier this year. While the law increases taxes for higher income earners, it also provides some much needed permanent estate, gift and generation skipping transfer tax relief to many taxpayers.

The 2012 Tax Act provides for estate tax and gift tax exemption amounts of $5.25 million in 2013 and that amount will be adjusted for inflation annually. The tax rate on gifts and estates over 5.25 million dollars is set 40%. Additionally, by meeting some technical formalities, under the 2012 Tax Act a surviving spouse is able to utilize the unused estate tax exemption of a predeceased spouse; this means that couples may now leverage a total of $10.5 million in estate tax exemption. All of this provides a great opportunity to simplify your estate planning and save money in the process!

Who should be considering simplification of their estate plan?

Clients with estates that were previously taxableIf a client previously had a taxable estate but now due to the 2012 Tax Act no longer has a taxable estate, then their plan should be reviewed to make sure that it is still tax efficient. For these clients, it may be possible to simplify their trusts and wills and in the process provide new terms for distribution of property after death, which are no longer driven by tax related concerns.

Surviving spouses who are beneficiaries of a “Family Trust”. A surviving spouse who is the beneficiary of a Family Trust created at the death of a spouse may be able to do-away with a Family Trust that was set up for estate tax avoidance purposes. Some of old Family Trust documents no longer meet the goals of the surviving spouse and may actually increase the amount of tax payable at the death of the surviving spouse.

Children or Grandchildren who are beneficiaries of old generation skipping transfer tax trusts (“Dynasty Trusts”). If your parents or grandparents established a trust for you and you are still deriving benefit from it, then that trust and your estate plan documents should be reviewed to make sure that the goals of you and your parents (and grandparents) are still being met. These old plans contain terms like the “exempt trust” and the “non-exempt trust” – and most clients have no clear understanding of how the trusts operate.  Some of these old trusts contain “powers of appointment” which may allow you to alter the plan to the benefit of you and your family, all while saving money.

Clients who do not understand their current estate plans. If you have a plan that was drafted with a lot of complex tax language and you no longer believe that you have a taxable estate, it is likely that your will or trust can be greatly simplified and that you will actually understand how the new plan will work.

Clients with life insurance trusts. For many years, attorneys were compelled to draft insurance trusts for clients to own insurance policies. These trusts (usually called Irrevocable Life Insurance Trusts or ILITs) were designed to own the life insurance of a client and yet have the death benefit under the policy not included in the client’s estate at death. The death benefit outside of the estate would provide liquid funds to beneficiaries to offset estate tax liabilities of a deceased person. The downside of life insurance trusts was that certain formalities (“Crummey Notices”) needed to be addressed each year in order to make sure that estate tax avoidance was ensured.  With the 2012 Tax Act, many of these life insurance trusts are no longer needed because the client’s estate is no longer taxable. It is possible to eliminate the insurance trust and the annual expenses related to Crummey Notices while keeping the insurance policy in force (this may be very important if you are no longer insurable). Of course, it may make sense to eliminate the life insurance altogether resulting in even greater savings.

If you fall into any of the categories discussed above, please call us at 414-847-6290 to discuss your options.