The expiration of the Bush tax cuts in 2013 has left many Michigan residents wondering what the future holds for federal estate tax exemptions. If Congress is not able to work out a deal with regard to these exemptions, the inheritance tax implications are going to affect many estate planning professionals and their clients in the upcoming year.
According to the Times Herald-Record, if things remain as they are, with no compromise, the current $5.13 million federal estate tax exemption level will expire and return to its previous level of $1 million. In addition, the current top tax rate of 35 percent will increase to 55 percent. Congress and the Obama administration are currently trying to find a compromise in the tricky situation, but so far they have not been successful. This unknown future for estate taxes is proving challenging for those currently working on their wills and trusts.
Protecting assets from estate tax responsibilities will get more challenging if the limits do regress, but this does not mean it is impossible. One potential form of protection is to use gifts to distribute the estate prior to death. Currently, individuals can give up to $13,000 tax free as a gift from their estate. This is not a perfect solution, though, because gifts can limit the individual’s ability to apply for Medicaid to pay for nursing home costs. All gifts given in the previous five years have to be reported, so this type of action can therefore incur a penalty period.
Because of the implications of these options, working with an estate planning professional to discover potential actions that can be taken, as well as the implications of those actions, is extremely helpful. People need to take the time now to learn all they can about estate planning, wills and trusts so they are better positioned to avoid taxes and penalties. With the help of a proper estate plan, excessive inheritance taxes may be avoidable.
Source: Times Herald-Record, “Protecting your future: Fate of estate tax-exemption level unknown,” Bonnie Kraham, Dec. 6, 2012