As you may have heard, in January we have some changes coming to our tax laws (assuming of course that Congress does not take action before then). On January 1, 2013 the estate tax exemption drops from $5,120,000 to $1,000,000. Not only is this a dramatic drop, but they will also increase the top estate tax rate to 55%. This means that $.55 on the dollar, for every amount over the exemption, will go to the government. For most of us, this is by far the largest tax we will ever pay.
These changes are significant and can be very costly for those not paying attention to the value of their overall estate or their estate planning itself. When trying to evaluate if you may be affected by these changes, it is important to consider exactly what is included in your estate. Simply put, your estate is everything you own. All of your real estate, brokerage accounts, checking & savings accounts, retirement funds and life insurance proceeds, and possessions are a part of your estate.
Let’s look at an example of a married couple. The couple owns their primary residence which is valued at $550,000 and a vacation cabin valued $250,000. They have combined retirement accounts (IRA, 401K, 403B etc) worth a total of $1,400,000. They also have brokerage accounts of $350,000 and checking, savings and CDs totaling another $200,000. Finally, they have life insurance policies that total $1,500,000. With their current assets they have an estate worth $2,750,000.
Currently this couple would pay no estate tax if both the husband and wife died before December 31st because their assets do not exceed the current exemption. However, If they died after January 1st $750,000 of their estate would be exposed to estate taxes at up to 55% – a loss of $412,500. Now, what about the life insurance. If you include the life insurance their estate, which the government does, it is valued at $4,250,000. Again, they would have been below the 2012 exemption and faced no estate tax, however, if they died next year $2,250,000 would be exposed to estate taxes. In this situation their tax bill would be $1,237,000. In a matter of only one day we go from $0 to a bill of $1,237,000. That is one very expensive day!
Of course there are things that you can do to plan in order to protect yourself and your hard-earned assets from being lost or significantly diminished. There has never been a more important time to talk about “death and taxes”. Procrastinating this time could cost you dearly.
Contributed by MH Cave Creek and Phoenix Estate Planning Attorney West Hunsaker
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This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.