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Estate Planning: Safe from Fiscal Cliff’s Edge

estate planning

Fiscal Cliff Avoided

Wake up! You’re safe. Splash some water on your face, take a cold shower and try to convince yourself that it was just a scary dream. Or was it?.. Americans concerned about estate planning can take a leisurely step backwards as we’re no longer teetering on the edge of a major financial overhaul. The 2013 Taxpayer Relief Act (ATRA) passed on New Years Day 2013 avoided the fiscal cliff – an event that was likely to have an enormous impact on estate planning clients.

How Law Impacts Estate Planning

The ATRA makes the provisions of the Tax Reform Act of 2010 (TRA 2010) permanent. What does this mean for estate planning clients? As we know from last time it’s important to keep up to date on your estate planning documentation. A change in the law is one of the main triggering events that should signal to you that your estate planning documentation may need to be updated.

The relevant provisions of the new law as it relates to estate planning are:

  1. Estates worth under $5,250,000.00 (exclusion amount) are exempt from federal estate tax. Great, you’ve avoided the Feds, but what about California?
    • California has not had an inheritance tax since 1982. What does this mean?!? In short, married couples in California can leave up to $10,500,000.00 to their loved ones through their estate planning documentation without payment of an “inheritance or estate tax.”
  2. The federal tax rate for estates over $5,250,000.00 is 40%.
    • Example:  A single person with an adjusted taxable estate of $6,250,000.00 would incur a tax of $400,000.00 on death ($1,000,000 x 40%).
  3. The “portability” provision has been retained. The basic concept of portability is that the unused exclusion amount of the first spouse to die may be used by the surviving spouse if an estate tax return is filed (Form 706).
    • Portability eliminates the need for Credit Shelter Trusts, A/B Trusts, By Pass Trusts and Disclaimer Trusts except as discussed below.
      • Portability hasn’t led to the elimination of “A/B Trusts” if spouses have different beneficiaries. A common scenario is when there is a second or later marriage where each spouse has children by a prior marriage. The intent of the spouses is to leave their separate property to their own children. An A/B Trust needs to be set-up as part of the estate planning package to protect the interests of the spouses.
      • Another situation that may cause wrinkles in your estate planning scheme is if one or both spouse’s are not residents of California.

Making Sense of the Gobbledygook

estate planningHow does all this nonsense impact your estate planning now and in the future? Unless you’ve got more than $5,250,000.00 your loved ones won’t have to pay taxes when you pass on. Time for all of us “normal- income-bracketters” to breathe a sigh of relief, right? Not necessarily.

The new law does not change the need for people in California with estates worth over $150,000.00 to create a living trust to avoid probate. If you’re worth more than $150,000.00, having a living trust as part of your estate planning package will save your loved ones thousands of dollars in the future by avoiding probate and court costs.

A living trust allows you to maintain control over your property during life and after death. It’s freely amendable too. So if your mind changes and you want someone else to get your stuff or administer your estate,  all you need to do is change it. It’s that easy.


About Sean Hanley

Practicing law since 2007, Sean specializes in the ever-changing laws related to real estate, business and estate planning. Embracing technology with a focus on personalized service, he understands the challenges of living and thriving in Silicon Valley. Tapping into his education in economics and business administration, Sean also serves on the non-profit Willow Glen Business Association.