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New tax plan: Not over the cliff, but into the weeds?

Congress managed to avoid sending us over the fiscal cliff, and the resolution has been met with mixed reviews by estate planning professionals. As analysts catch up with the details of the tax package, a few key points have emerged.

First, the good news: The estate tax exemption of $5.12 million is now permanent. Lawmakers heeded their constituents' concerns that the pre-Bush tax cut levels were simply too harsh -- and they went a step further. Over time, the exemption will be adjusted for inflation. The law also made the exemption portable between spouses. (We'll cover portability in our next post.)

The not-as-good news: The tradeoff for the estate tax is a change in tax rates for high-earning Americans. Not only did the income tax rate increase, but taxes on capital gains and dividends went up, too. The plan is complicated, and individuals and families should consult with an estate planning professional to understand better how their own estate plans will change as a result.

The new law also affects tax liability on grantor trusts and directed trusts. Both were especially popular planning tools in 2012, when the future was uncertain. Now, planners and their clients should review the trust documents to determine what the effect of the new law will be on the trust, trustor, trustee and beneficiary.

Life insurance is a terrific estate planning tool, and it may prove an even better one for some people under the new tax plan. In addition to discussing portability, we will go into more detail about life insurance in our next post.

Source: Financial Planning, "Estate Planning Game Changer," Martin Shenkman, Feb. 1, 2013

Our firm helps clients with estate planning issues like the ones addressed above. If you would like to learn more about our Ohio practice, please visit the estate tax planning page of our website.

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