If you had been the captain of the Titantic and had been forewarned that it would hit an iceberg at 11:40 p.m. on April 14, 1912, would you have taken some evasive action?
What if you knew that, come 12:01 a.m. on January 1, 2013, everything over $1 million in your estate would be taxed, maybe at rates as high as 55%? Wouldn’t it be prudent to take some evasive action now?
So why haven’t you?
Here ‘s what is about to change, thanks to politics and Congress. The extension on the estate tax cuts runs out at the end of this year. That 55% tax rate is going to kick in $8 million sooner.
Right now, there is a $5 million exemption before estate taxes become relevant. As an extra bonus, the exemption is portable between spouses. The end result is that a husband and wife have a total of a $10 million exemption.
The portability and the exemption aren’t automatic. To claim the exemption and to make it portable to the spouse, the deceased’s estate has to file a form 706 with the IRS within 9 months from the date of death.
Beginning next year, the tax cuts run out and the exemption drops back to $1 million plus change. A lot of estates will be exposed to an estate tax, and a lot of people will be unhappy. Without addressing the threshold question of why death should be a taxable event – here are some of the uncertainties.
There are less than 9 months left in this year. If a person dies now, will the estate still be able to claim portability and the $5 million exemption if the 706 is filed after January 1, 2013?
After January 1, 2013, will there still be portability on the $1 million amount, so that a couple will get a total of $2 million, or does the portability go away?
What happens to the portable amount for estates that filed a 706 prior to January 1, 2013? If the deceased’s estate was worth $3 million, then there should be a $2 million leftover exemption that is portable to the spouse. But if the spouse dies after December 31, 2012, her estate is eligible to claim only a $1 million exemption. Will her estate get to claim her spouse’s left over $2 million exemption, too, or is it lost forever?
And the big question – what will Congress do?
Which leads to the final question – will you sit on the deck and watch disaster unfold, or will you seize control of the wheel and change destiny?