Responding to the Expiration of the Estate Tax Bill

Tax Professionals' Resource
December 17, 2012 — 1,433 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

On January 1, 2013, individuals with large estates will see that their estates are drastically impacted by the introduction of a reduced tax-free allowance. Under the previous Bush tax cuts, individuals were able to claim up to $5 million of their estates as exempt. After January 1, however, individuals will only be able to claim up to $1 million of their estates as exempt.

Estate planners and attorneys should be prepared for a high influx of clients to require services near the end of 2012. Clients will want to learn about ways they can avoid the newly reduced exemptions. Using standby trusts is one way that estate planning attorneys can help their clients. A standby trust is a revocable trust that can be used to manage the assets of a person who has a disability. To make use of this trust instrument, the donor will have to relinquish his or her power to revoke the trust.

Another estate planning strategy that can be used to help clients is the QTIP election. A QTIP election can be made can be made in lieu of using the marital deduction. The QTIP election allows a gift to qualify for the marital deduction if certain conditions are met. A spouse will have to waive all or a portion of the income interest of the other spouse in order to be able to take advantage of the QTIP election. The election must be made on a tax return that has been filed in a timely fashion.

Estate planning attorneys will want to review all of the current trust arrangements that clients have before January 1, 2013. Attorneys will want to make sure that a majority of the transfers that a client makes will continue to be exempt, despite the lowered exemption amount that will be enacted on January 1. One should review the life insurance transfers that an individual currently makes in his or her estate. It will be important to make sure that any life insurance transfers continue to be fully exempt in 2013. Also, a client may not be aware that he or she is making a gift in a trust that includes a general power of appointment. If this is the case, then an attorney may want to recommend ways to change the general power of appointment into a limited power of appointment. The attorney can do this by making the appointment into a power that is limited by an ascertainable standard.


Tax Professionals' Resource