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opportunities for estate planning
IN 2012 AND BEYOND IN LIGHT OF
CURRENT FEDERAL ESTATE AND GIFT TAX LAW
 | Since 2001 the federal
estate tax has been in a state of short-term fluctuation and long-term
uncertainty. In December 2010 Congress temporarily increased the estate tax exemption to
$5 million for decedents dying in 2011 and 2012. As of January 1, 2013,
however, the exemption is due to revert back to $1 million, unless Congress
intervenes in the meantime. The 2010 legislation also made substantial changes
to the federal gift tax and how married couples might use their combined
exemption amounts, both of which are discussed below. |
 | The
failure of Congress to set a permanent federal estate tax exemption amount is
unfortunate, since it prolongs the element of uncertainty in the estate planning
process, especially for married couples. |
 | Note on
Pennsylvania Inheritance Tax.
These changes in federal estate
tax law will not affect the Pennsylvania inheritance tax, which will continue to
be imposed on the transfer of taxable property at death (other than to the
surviving spouse), at rates that are based on the relationship between the
beneficiaries and the decedent. There is no exemption amount applicable to the
Pennsylvania inheritance tax. |
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This article discusses the current rules governing the federal estate and gift
tax, and the planning opportunities arising from them. |
CURRENT ESTATE
PLANNING OPPORTUNITIES
Given the $5 million exemption available
for gifts made in 2012, and the uncertainty of
what the federal estate and gift tax exemption amounts will be after 2012, what are the
planning choices that married couples and individuals should now consider?
Take Advantage
of the $5 Million Gift Tax Exemption in 2012
 | Gifts of assets made during lifetime can
save significant taxes when compared to passing such assets at death, since
all post-gift appreciation in value will escape taxation. |
 | Taking advantage of the $5 million
exemption for gifts made in 2012 will allow donors to make significant transfers of
wealth. This opportunity may be lost if the gift tax exemption amount is
reduced for 2013 and beyond. |
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In any event, lifetime gifting should continue
each year within
the limits of the annual gift tax exclusion (currently $13,000 per donee) or
the unlimited exclusion for tuition or medical expense payments. Such
gifts can be made over and above the gifts that will take advantage of the gift
tax exemption.
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Plan for
the Contingency of Fluctuating Estate Tax Exemption Amount
 | Given that the federal estate tax exemption could
range from $1 million to $5 million, flexibility is the key principle in
designing estate plans that aim to minimize the federal estate tax at a time
(i.e., the year of death) when the amount of the exemption is unknown. Here are two planning ideas:
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 | Spousal Disclaimer Trust
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One flexible solution for married couples is
to have an initial "all to my spouse" bequest in each spouse's will, but then
provide for a contingent "credit shelter" or "bypass" trust that the surviving
spouse could trigger by making a post-mortem disclaimer of all or a specific
percentage or amount of the outright bequest. With the disclaimer approach, the
surviving spouse can choose exactly how much (if any) of the first spouse's
estate to place into the trust in order to utilize some part or all of the first
spouse's estate tax exemption. The surviving spouse would be both the lifetime
beneficiary and a co-trustee of this trust.
 | Partial QTIP Trust |
As an alternative to the
spousal disclaimer trust, planning could involve the creation of a single trust
to receive the entire estate of the first spouse to die. The surviving spouse
would be the sole beneficiary of this trust. The executor could then elect how
much of the single trust to qualify as QTIP property for the marital deduction.
This partial QTIP election would take into account both the first spouse’s
exemption amount, and the likelihood of an estate tax being imposed at the
surviving spouse’s death.
Update Spousal Estate
Plans in Light of the New Concept of Portability
 | The new tax law provides significant
relief for married taxpayers by enhancing their ability to use both spouses’ exemption amounts
regardless of the order of deaths. A common problem had been that the exemption of the first
spouse to die would be partially or even totally wasted if he or she did not individually own assets
that were at
least equal to the exemption amount. The new law now provides that the
surviving spouse’s estate can use both his or her own exemption amount, plus
any unused exemption amount from the first spouse’s estate. |
 | This change eliminates the need for
spouses to unwind jointly owned property as part of the estate planning
process in an attempt to ensure that each would own significant assets. Now
they can continue to own their property jointly if they wish. |
 | One important caveat to this portability
concept is that the surviving spouse’s estate’s use of the first spouse’s
unused exemption amount will not be automatic. In fact, the executor of the
first spouse’s estate must file an Estate Tax Return in which the unused
exemption amount is computed and an election is made allowing such amount to
be used by the surviving spouse’s estate. In addition, the return must be
timely filed (usually nine months after the death of the first spouse.) Thus,
planning for the preservation of the unused exemption amount must be done at the first
spouse’s death. If not done then, it will be too late to claim the unused
exemption amount at the surviving spouse’s death. |
 | This portability provision is due to
expire at the end of 2012. However, portability may prove to be so popular a
concept that it will be continued in the law regardless of what other changes
may occur as of 2013. |
Use a Valuation
Discount Entity
 | Even if the estate and gift tax
exemption amount remains at $5 million, there will still be good reasons,
particularly with an active family business or family investments that are
closely managed, to shift existing assets and future appreciation to younger
family members while allowing the senior family members to retain control. The
use of Family Limited Partnerships and
Limited Liability Companies will remain excellent
solutions for these clients, as well as for clients who are seeking to protect
their assets from future creditors of either themselves or their children.
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NON-TAX REASONS
FOR ESTATE PLANNING
 | Even if the federal
estate tax exemption amount has been increased to a level that is well above the
size of a couple's assets, there are still many non-tax reasons why you should
have your estate plan periodically reviewed and updated. At a minimum, you need
to have documents in place that adequately answer the following questions: |
"What will happen if during
my lifetime I become unable to take care of my own personal and health care
needs"?
"What will happen if during
my lifetime I am no longer able to manage my property"?
"Who do I want to receive my
property at my death"?
"Who should wind up my
affairs after my death"?
"How can I lower the federal
and state taxes that my family will have to pay"?
 | As to your intended
beneficiaries, Congress obviously cannot legislate away problem areas such as
spendthrift heirs, handicapped children, substance abuse, divorce, and
immaturity. Protecting beneficiaries in these situations will remain an
important estate planning goal. |

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