Reposted from BizJournals.com (August 19, 2011) – Article by Tamarind Phinisee —
An upcoming change in federal tax exemptions should cast proper estate planning in the limelight, financial planning experts say.
Currently, the amount of money or property that individuals and/or business owners can transfer free of federal gift and estate taxes is $5 million per person. But this federal tax exemption/transfer taxes will be reduced to $1 million in 2013, as the sun sets on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act on Jan. 1, 2013. President Barack Obamasigned that act into law last December, and it became effective Jan. 1, 2011. The law will sunset on Jan. 1, 2013, returning the tax rate to 55 percent as opposed to its current mark of 35 percent unless another tax law is passed.
“The prospect of losing more than half of what you have spent a lifetime building is not attractive to many people,” says Charles Matt, CFS for Sapient Financial Group, adding that current federal gift and estate tax rates are at modern day lows that are only available this year and next year. “Since most people won’t want to take advantage of this opportunity by dying in 2011 or 2012, gift planning is what people should care about now.”
Matt Spahn, estate planning attorney and owner of Spahn Law Firm, says planning now increases options and choices. Furthermore, Spahn says, it’s impossible to know what other changes Congress will make between now and the January 2013 effective date of the tax exemption reduction.
“Perhaps Congress will act before Jan. 1, 2013, just 16 months from now, and make anything over $500,000 subject to taxation. That was the rate once before,” Spahn says. “You can wait and see and lose big time. (Or) you can act now and be very confident of the rules that apply.”
Darryl Lyons, a certified financial planner and partner and founder of PAX Financial Group LLC, agrees.
“I have seen businesses shut down and families completely torn apart by not paying attention to this issue,” Lyons says. “I know it’s a hassle and I know it’s not ‘fair.’ But at the end of the day, ignoring proper estate planning magnifies family challenges that already exist.”
Estate planning’s role
Therefore, Lyons says, estate planning is key, including accounting for potential taxes.
“The tax bill is due quickly. Do you pay with cash from the estate, borrow from the bank, or life insurance proceeds?” Lyons ask. “Interestingly enough, in many cases with proper planning this estate tax can be completely mitigated.”
Making the point for estate planning’s role, Spahn adds that apart from the IRS many other things can endanger a person’s estate.
“What are the other seven things that can take your property, the property you want to leave to your beautiful children? Their spouses, divorcing spouses, creditors, predators, bankruptcies, judgments and liens,” Spahn says. “Probate assets and non-probate assets are all part of an individual’s estate, no matter what you’ve heard. Hard-working, decent Americans are at risk here. The estate tax isn’t just for the other guy, the guy you think is really rich.”