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Gratifying New Estate Tax Law

As we waited in anticipation to see how the estate and gift tax increases in 2013 would affect everyone, we came to the conclusion that many things we thought would be attacked were not – such as the grantor retained annuity trust (GRAT).

However, among the recent changes with the new estate tax law is the permanent 40 percent rate (up from 35 percent last year) which applies to gift and estate tax, and the increase in the estate tax exemption, which is $5.25 million in value for individuals and $10.5 for married couples (estimated for 2013 using $5 million indexed for inflation as of 2011). The $5.25 million exemption is permanent, and it is indexed for inflation. This increase is not a new exemption, but rather an extension of the exemption that had been set to expire at year-end. The inflation will increase every year, but will allow people to make a yearly gift if they’ve gifted up to the maximum $10 million.

In addition, this change has allowed us to see a clear line of demarcation until the law changes again, which it mostly likely will. Until that time, we have the opportunity to help our clients make better informed decisions because we now know where the “permanent” stands. This platform helps us as advisors have in-depth conversations with clients about the reality of their estate tax burden, find out how they feel and most importantly what they want to do.

We have the contingency to help clients plan without looking over their shoulders, even if they’re below the $10.5 million mark because we know where the tax starts to hit. A client typically has four options to pay the tax:

  1. In cash
  2. Use Section 6166
  3. Take out a loan
  4. Use life insurance – if you do a present value analysis, in most cases life insurance becomes the wiser way to pay the tax


However, trust planning is an important process a client must consider. For example, let’s imagine there is a couple at the $10.5 million mark, and the wife passes away in her mid-50s and $5.25 million goes into a trust. The husband has a life expectancy of another 20-25 years – assuming they’re both around the same age. At a 5 percent growth rate, the money in the wife’s trust will double to $10 million. When the second spouse passes, that total $10 million is sheltered in tax and the only thing to worry about is the remaining tax on their estate.

Another technique after a spouse passes is for the remaining spouse to spend down his or her money without worrying about disinheriting the kids, if that’s an objective, because they’re still going to be able to protect them with the $5.25 million. The inheritance would not have generated any estate taxes because an unlimited marital deduction exempts all property left to a surviving spouse.

Today, there is still a lot of uncertainty about the future of the financial industry. However, what we can be certain of is that there are a lot of opportunities and this is an ideal time for producers to counsel clients about the tax advantages. We need to encourage our clients to take advantage of this circumstance because it will enable them to manage their financial portfolio far better than they have been able to in the past.

Exit Strategy Planning: A Profitable Way to Help Boomer Business Owners [email protected].

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