Wednesday, May 2, 2012

Beware estate tax misinformation

We have seen this in a couple of different venues now, so it is not just a coincidence. Articles on the importance of estate planning in this election year, with its (revisited) uncertainty about the extension of or abolition of estate tax exemptions, are giving people misleading information.

Put simply, there is nothing that you can do in your personal planning documents now that will "lock in" the current $5 million exemption equivalent, so that you can guarantee that it will be available at that level in future years. All three of the major transfer taxes - estate tax, gift tax, and generation-skipping tax - determine their lifetime per-person exemption amounts as of the date of the decedent's death, not as of the date of the execution of planning documents.

(Yes, using life insurance and other financial vehicles outside of planning documents, you may be able to restructure your financial picture to approximate the same result. But that can be done at any time.)

Although gifts are taxed at the time of the gift, not at the date of death, it is the lifetime gift tax exemption that controls how much the decedent can transfer free of gift taxes, and the exemption amount that is in force at the time of his death controls. If Arnold makes a $4 million gift to his son Bert this year, it will not be taxed this year, because this year's exemption is $5.12 million, but if Congress later reduces the lifetime exemption to $3 million, only that amount of the gift will be free of tax. There is no doubt that opposition to any proposal to reduce the lifetime gift tax exemption amount below the current level will include stories of people who have already made substantial gift "in reliance on" the current levels. The experience of recent years, however, tells us that no one should put much reliance on stability in the transfer tax rules.

If you live past December 31 of this year, there is no way that you can use this year's exemption amount unless it is extended. For a decedent who dies in 2016, it is that year's applicable exemption amounts that will control for this purpose, regardless of what he does this year.

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