Planning for Change

February 2012

As of December 2011, there appeared to be no immediate changes in estate law for calendar year 2012. However, Oklahomans should still be aware of the current rules and regulations in estate law.

Estate law in 2012

The rules for 2011 and 2012 provide for each individual to be able to transfer assets having a value of less than $5 million. These transfers may be made during the lifetime, at death or a combination of the two. This “unified concept” for exemption for estate and gift tax is in effect for years 2011 and 2012 only.

Effective for deaths after Jan. 1, 2010, there is no longer any Oklahoma estate tax. There has not been any Oklahoma gift tax for many years.

There is a new concept of “portability,” which dictates that if a spouse dies in 2011 or 2012, the executor of the deceased spouse’s estate may elect to transfer any unused estate exemption from the deceased spouse to the surviving spouse.

Because the executor of the first spouse’s estate must make an election on the estate tax return, it is necessary for a federal estate tax return to be filed, even if it would not otherwise be required. The concept sounds simple, but there are several reasons to continue using marital trust planning at the first spouse’s death and not rely on the portability provision.

If you forego marital planning, you may waive asset protection, growth tax-free in bypass trust, management and restriction of transfers by the surviving spouse outside the intended beneficiaries.

Smaller gifts in 2012

Not many can afford to make such large gifts, but there are rules in effect for smaller gifts that can be more applicable. In addition to the $5 million exemption, there is an annual exemption for gifts made to individuals.

Although it is indexed for inflation, the gift amount will remain at $13,000 per donee during 2012. This means that an individual can give $13,000 in cash or other assets to as many individuals as he or she wishes.

A married couple can double this amount and give $26,000. If the assets are held in the wife’s name, she can give $26,000, so long as the husband agrees to “split” the gift with her.

In addition to the $13,000 amount, which is allowed annually, an individual may pay for any qualified medical expenses or qualified education expenses, but it is required that the payment be made directly to the educational institution or to the medical facility.

When to update

Individuals should review or update their estate-planning documents often, but especially at major events in one’s life. Those could include marriage or divorce in the family, new births or adoptions in the family or change of state residence.

Other events that might trigger a review include serious illness or disability, death of a family member, substantial increase or decrease in assets and any congressional changes. If none of these situations apply, then every three to five years is a standard guideline for a review and update.

I also recommend that individuals consider charitable gifts, if they are so inclined.

A charitable gift to a qualified charity allows a deduction for income tax purposes and also avoids any transfer tax, such as estate tax or gift tax.

If an individual wants to make a substantial gift or use a more sophisticated device such as a charitable trust, the individual should seek professional help.

The future of estate planning

It is difficult to predict what will happen in Washington, D.C., but if nothing happens by Dec. 31, the rules will go back to pre-2001 amounts. The exemption for gift and estate transfers will be reduced to $1 million, and the annual exclusion for gifts will go back to $10,000 as indexed.

If this happens, I expect there will be more debate in Congress and more proposed changes. If Congress freezes the exemption at $5 million, then I predict this will become the standard law, and there will not be substantial change in the near future.

The fact that there has been uncertainty in tax law for several years does cause a chilling effect on planning.

Many individuals are waiting to see what happens, and this could lead to unplanned estates and unfortunate consequences.

I am hopeful that Congress will act responsibly with the changes, and we will see stability for taxpayers and advisers alike.


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