How many of you are aware of H.R. 4853? If you are like most people, you might ask what H.R. 4853 is and what it has to do with you. H.R. 4853 is “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” that was approved on December 17, 2010 by President Obama. This bill became effective from January 1, 2011 through December 31, 2012. It also contains a provision that extends the estate, gift, and generation skipping transfer tax exclusions through the end of this year. If Congress does not act before the end of the year, the estate tax rate will revert to pre-2001 rates. Again, you may be asking yourself what this actually means to you.
Currently the estate tax exemption is $5,000,000, and the top tax rate is 35%. This means you can currently give away, or bequeath, up to $5 million per person and not be subject to estate taxes. Please keep in mind this is a lifetime gift amount. However, the current estate tax exemption will sunset at the end of 2012. If there is not a change to the current estate tax provision, the exemption will reduce to $1,000,000 and the top tax rate will increase to 55% in 2013. If this happens, will you be prepared?
The best laid plan is one that is set up in advance and built for contingencies. Failing to plan for your estate appropriately could lead to heartache for your loved ones. The estate tax limits could all change given that this year is an election year. However, there are some actions you can consider taking this year to plan properly.
1. Review your estate plan. When was the last time you did this? Are the documents organized and do your loved ones know how to access the documents when needed? Many people spend their lives working hard and building their assets. Along the way they may set up some basic estate planning documents such as a will and power of attorney. However, as their asset base grows their situation can become more complex and could require more planning.
2. Sit down with your financial planner and estate attorney. These professionals are most aware of the changes to the laws and your personal situation. Spending some time with them could provide significant peace of mind for your future. Make sure to bring in any current wills or trusts. Situations change and assets change. So it is important for the right assets to be named appropriately in any wills and trusts you may have.
3. Review and update your beneficiary designation forms and account information. Certain types of accounts, i.e. IRAs, will transfer outside of a trust or will. They have their own provisions and should be reviewed periodically to ensure that they still reflect your estate planning goals.
4. Set up a trust. This could be an important step in protecting your assets. There are a number of types of trusts to meet the needs of your specific estate situation, i.e. Revocable Trust, Credit Shelter (Bypass) Trust, Irrevocable Life Insurance Trust, etc. Reviewing your situation with your financial planner and estate attorney will help you to find the best solution to meet your specific needs. Trusts are a means of protecting your interests for future generations. They can also protect against irresponsible members of the family, immature children, creditors, or ex-spouses.
5. Understand your state provisions on estate taxes. Every state is different with regards to estate taxes. Check to see if your state of residence has a state estate tax.
Thorough planning is one of the best ways to achieve future success. The reason an estate plan is important is to ensure that your present wishes are carried out in the future. Why wait until tomorrow when you can ensure your wishes are carried out today? Think about the peace of mind this will bring for yourself and your loved ones. Please contact your estate attorney or if you have more financial planning questions, please contact Jarrod Upton CFP® or Chris Troseth CFP® at Investors Asset Management, Inc., at 972-985-7162.
For related IAM Insights to estate planning see Searching for Clarity with Estate Planning and What Does Peace of Mind Look Like to You?
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