The more things change, the more things ... change. When Congress passed the tax package that averted the fiscal cliff, it also opened up a few cans of worms for estate planners. The challenge now is to review those plans in light of the tax increase for high-earners as well as the Medicare surtax that was part of the Affordable Care Act. At least the estate tax exemption is more generous than it could have been at $5.12 million.
One important tool in estate plans is actually more attractive after the law changes, analysts say. Life insurance has been seen as a way to keep assets out of probate and to make sure surviving loved ones had enough to go to college, to buy a house or just to make ends meet. And, if the life insurance benefits were specifically meant to pay estate taxes, chances were good that a person would set up a life insurance trust.
The trust may not be as necessary now, thanks to the estate-tax threshold remaining high. With couples' having as much as $10.24 million of an estate exempt from taxes in 2012, the need to protect the life insurance payout with a trust diminishes. It is now less of a risk to own a policy outright.
The rationale for a bypass trust -- a type of trust that allows a surviving spouse access to funds but does not add those funds to the surviving spouse's estate -- has also changed with the higher threshold. Again, it may not be necessary to protect assets the same way for less well-to-do couples.
As we said last time, and as we will say again, each couple and each estate plan is different. Tools like bypass trusts and life insurance policies are helpful to some and not helpful to others. The key to making the right decision for your family is to work with a trusted adviser with ample experience in estate planning.
Source: Financial Planning, "Estate Planning Game Changer," Martin Shenkman, Feb. 1, 2013
Our firm helps people determine which estate planning tools, including the ones discussed above, are best for them. You can learn more about our practice at the Cuyahoga Falls, Ohio, estate tax page of our website.