|January 31, 2013|
Previously published on January 2013
When the estate tax exemption first reached $3.5 million in 2009, we cautioned clients to review their estate plans to be sure the significantly larger exemption did not have unintended consequences, especially in light of the fact that many experienced material decreases in the value of their assets during 2008. Some people did nothing at the time because the $3.5 million exemption was originally intended to apply only during 2009.
Now that the exemption is permanent and at an even higher level of $5 million, adjusted for inflation to $5,250,000 in 2013, it is even more important to review your estate plan for unintended consequences. For example, if a 2013 decedent has a total estate of $6 million and has a will or trust that leaves the maximum amount that can be transferred free of estate tax to his children and the balance to his spouse, the children would receive $5,250,000 and the spouse $750,000. This result is likely not what the decedent intended if he prepared his will or trust in a previous year when the lifetime exemption was only $1 million, or even less. Similarly, a will or trust that allocates the maximum generation-skipping transfer tax exemption amount to a trust for a child, with the balance directly to the child, might result in substantially all of the child’s inheritance being held in trust.
Now that the higher exemption has been made permanent, you should again review your estate plans to determine whether the $5,250,000 exemption may cause consequences you do not intend. Another permanent aspect of the law is “portability,” which is the ability to use the exemptions of both spouses at the death of the second spouse, even if no exemption planning is done at the first death. While significant reasons still exist to use to the exemption at the first death, you may want to review this subject with your estate planner to discuss the pros and cons of portability.