Trust & Estate Practice Group

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More than 2,500,000 people die in the United States each year, but few have signed the basic documents necessary to ensure their estates will be administered effectively and in accordance with their wishes.  In the absence of such documents, your state's intestacy laws would govern the distribution of property and make certain default "assumptions" about how that property would be divided.  How would you feel about the state's laws controlling the distribution of your assets?

Completing the basic documents needed in an estate plan can ensure that you will not have to worry about answering that question.  Both a will and a revocable trust can be used to transfer assets at death, and thereby avoid the application of the intestacy statutes.  Each document may be used to name your personal representatives (often called executors) and/or guardians for minor children, each may be used to create testamentary trusts that may be needed for tax planning or special needs purposes, and each may specify to whom and when your property may be distributed.

If you have previously completed an estate plan, when was the last time you looked at it?  It is strongly recommended that these documents be reviewed at least every five (5) years, and more often if there is a change in the law, your finances, or your personal circumstances. 

As you may know, on January 2, 2013, Congress and the President enacted the American Taxpayer Relief Act of 2012 ("ATRA"), which extended many of the expiring tax cuts dating back to the Bush Administration.  Importantly, ATRA contained provisions to permanently extend the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRA 2010") that was signed into law by President Obama on December 17, 2010.  TRA 2010 made significant changes to the estate, gift and generation-skipping transfer ("GST") tax laws that were then in effect, including the reunification of the gift and estate tax exemption amounts, the introduction of the "portability" rules, and the increase in the applicable exclusion amount to $5,000,000 per person, with annual adjustments for inflation.  But for ATRA, these provisions were set to expire on December 31, 2012, leaving estate planners with the bleak prospect that the tax rates and exemption amounts would revert to levels not seen since for a decade, namely a $1,000,000 exemption and a 55% tax rate.  ATRA has ensured that the $5,000,000 inflation-adjusted exemption amount and a 40% tax rate for the estate, gift, and GST taxes would be permanent.  With this in mind, now is an excellent time to have your estate planning documents reviewed to ensure they are in compliance with this now-permanent legislation.

With ATRA in place, each person may exclude up to $5,250,000 from gift or estate tax in 2013.  To the extent a taxable gift is made during life, the use of your gift tax exemption will reduce your available estate tax exemption dollar-for-dollar.  Under ATRA, a surviving spouse may elect to transfer any unused exemption amount from his or her deceased spouse (known as the "portability" election) by filing a federal estate tax return within nine (9) months of the spouse's death.  Maryland and the District of Columbia each assess their own estate tax on estates valued above $1,000,000, so residents of those jurisdictions should consult with an estate planner if their estates are above that limit.  Sometimes, simply owning a valuable residence or holding a large life insurance policy will be enough to trigger the estate tax in those jurisdictions.

Whether you have made a promising investment or own a business and are expecting a huge payoff (such as a sale or initial public offering or the introduction of a revolutionary product), think about shifting some of this unrealized gain to beneficiaries outside of your estate.  Once the appreciation has been realized, it will consume more of your available exemption amount (or require you to pay gift tax on any excess) in order to transfer it to your beneficiaries during your lifetime or at death. If you can afford to transfer specific assets or stock positions before they increase in value, any post-gift appreciation on those assets will be sheltered from both the gift and estate taxes. 

Advanced strategies to transfer wealth out of an estate such as gifting to irrevocable trusts, transferring life insurance policies to irrevocable life insurance trusts ("ILITs"), transferring assets to grantor retained annuity trusts ("GRATs"), engaging in installment sales to family members or trusts, or compressing the value of non-controlling or non-marketable business interests through the use of valuation discounts are all still permitted under ATRA.  If your estate is taxable you should consider discussing ways to avoid triggering the estate tax at your death.

Finally, don't put off having your estate planning documents updated if there is a change in your personal life.  If you get married, divorced, or are widowed, these documents should be reviewed and updated to ensure that your assets will be administered effectively.  This is especially important with respect to beneficiary designations on retirement accounts, life insurance, savings bonds, jointly titled bank or brokerage accounts, and real estate.  Much of the good planning work can be undone by outdated or inoperative beneficiary designations.  You should consult with one of our attorneys to ensure all of your designations are updated to comply with your overall estate plan.

If you think it's time to have a review of your documents completed, please talk with a member of the Trusts and Estates practice group at Jackson & Campbell, P.C.  Our attorneys can will help to ensure that your plan meets all of your personal objectives and comply effectively with the new estate and gift tax legislation.  The author may be reached at or 202-457-1627.

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