The estate tax exemption is scheduled to change—again—at the end of 2012. Attorneys and financial planners are advising clients to take stock.

Time was on the side of New York Yankees owner George Steinbrenner and textile heir Roger Milliken. Along with four other U.S. billionaires, they died in 2010 while the federal estate tax was on a one-year hiatus.

The estate tax came back in 2011 and 2012 with a higher individual asset exemption—up to $5 million from $3.5 million in 2009—and new options for couples.

But now, uncertainty looms again. The $5 million federal exemption is scheduled to run out at the end of this year (unless Congress decides otherwise), dropping to $1 million.

Although Ohio’s estate tax ends on Jan. 1, 2013 (see “Ohio Estate Tax Repeal”), the shape-shifting federal estate tax will endure in some form. Opinions vary as to what form it will take. Accountants, attorneys and financial planners are advising clients to safeguard their estates by knowing what changes emerged for 2012 and what could happen in 2013.

The estate tax has been a moving target for more than a decade. President George W. Bush’s tax cuts ramped up the exemption, which many expected would lead to a phase-out. As part of the renewal of the Bush tax cuts, the estate tax returned in 2011 at a maximum rate of 35 percent. By comparison, the 2009 rate was 45 percent.

For 2012, the exemption remains $5 million ($10 million for couples) and a 35 percent rate. This year also added portability to the exemption; a surviving spouse can inherit the unused portion of the husband or wife’s exemption and add it to his or her own exemption. If portability survives past 2012, it could reduce the need for A-B trusts to prevent double taxation.

The uncertainty about 2013 means anyone with an estate exceeding $1 million needs to take stock of his or her assets. “We’re trying to get people’s attention. We’re months from the Dec. 31 deadline. This is the year to do very serious valuation,” says Robert Mapes, a principal and accountant with Rea & Associates.

The danger lies with people who don’t think their assets surpass the magic number. In 2013, a six-figure house, a pension, life insurance and other assets will quickly outstrip the exemption. “People who don’t think they have $1 million will get close. The value of their house and their life insurance, anything they’ve put in a trust, 401(k), IRA gets funneled into a big number, and that is their taxable estate,” says attorney Bea Wolper, president of Emens & Wolper Law Firm.

With the estate tax pendulum still swinging, those planning for their estate need to be on their toes and willing to make shifts. “If you are considering an estate plan, make sure you have flexibility in it so you don’t get hit by some change. You are planning so you can get in and out of techniques if necessary or match them if there are changes,” says John Schuman, a principal at financial planning firm Budros, Ruhlin & Roe.

Family Planning

Changes to the estate tax have increased the need for a nimble estate plan. Estate planning still requires a degree of balance. An estate can be driven below the tax threshold, but it must plan for the rest of a person’s life.

Knowing the new thresholds is a start, but estate planning should take a broad look at where the money and assets will go, especially if there’s a desire to avoid the federal estate tax. “You want to spend it wisely as though you will live forever, but you want your paperwork done as if you are going to die tomorrow. If you still own it at the time that you die, it’s probably going to be taxable. You can give it away, but when you give it away, you cannot own or control it anymore,” Wolper says.

Flux in the estate tax’s status has caused some trepidation. With shifting annual exemptions, changes to charitable giving and the introduction of portability, some individuals have put off planning. “One of the reasons it has been difficult to accomplish much in estate planning is because of the uncertainty. People tend to procrastinate when there is uncertainty,” says Paul Gydosh, managing director of Kensington Wealth Partners.

Most advisors agree that the key hurdle isn’t planning, but rather implementation. Making an estate plan can include hard decisions and gifts that remove certain assets from an individual’s control. While neither clients nor attorneys can control the federal estate tax, solving other issues can put the estate on better footing. “You will never have every variable nailed down. If we can eliminate or put them in boundaries, [estate planning] becomes a much more straightforward process. We eventually narrow down most of the variables to get to where they can enter retirement,” Gydosh says.

All the attention paid to 2010’s lack of an estate tax misses one point, Mapes says: the capital gains tax. Any death in that year did not improve the basis for the assets. “When you died without an estate tax, you did not get a step up in basis. The children get their basis. If your plan is not to sell it for many generations, it’s not a big issue,” Mapes says.

Numerous options abound for those looking for a place to park their assets. Many clients run into difficulty regarding which ones will end up in probate court. “If you put everything in irrevocable trusts, it will be free from probate and trusts. The IRS doesn’t care if it went through probate or not,” Wolper says. Under an irrevocable trust, the grantor removes the trust’s contents from estate assets, but also cedes control.

For most individuals, estate planning strategies depend on the specific mix of assets. Someone close to the exemption threshold might be able to get below it with a few divestures or gifts. Those with greater wealth have a larger menu of choices. “There isn’t really a one-size-fits-all. It does take detailed analysis based on the assets you hold, your ages and the number of heirs,” says Thomas O’Reilly, vice president and senior relationship manager for PNC Wealth Management.

The grantor retained annuity trust (GRAT) is a popular option. Low interest rates, low taxes and high exemptions make it a good option for moving assets to heirs. These trusts can last as little as two years, making them ideal for some people pushing up against the estate tax. “If you have a growing business, you can transfer a lot of appreciation to the heirs,” says David Gillespie, senior wealth planner and vice president of PNC Wealth Management. Gillespie notes that there is a proposal to extend the minimum GRAT term to 10 years, which would amplify the risk.

Shift in Gifts

Unlike in 2010, gifts from an estate are a popular choice in 2012. Because of the estate tax suspension, there was no incentive to give charitable gifts two years ago, Schuman says. But with a $5 million gift tax exemption in 2011 and 2012, many with large estates are taking full advantage. “The exemption has never been at $5 million and the gift tax has never been at 35 percent. If you have the wherewithal, give away your $5 million,” Schuman says.

Individuals may give a gift of up to $13,000 to any other person ($26,000 for couples) without declaring the gift for tax purposes. Anything larger must be reported to the IRS. Although there is a tax on large gifts, the gifts can grow tax-free, up to a point. “On gift tax, you only pay the amount going to your kids. The future growth is out of your stake. If you hold onto it, future growth is taxed when you die,” Schuman says.

While avoiding the estate tax can be a major motivator, making short-term decisions without evaluating the long-term impact can be risky. In many cases, Gydosh notes, the size of the mistake depends on the size of the estate. “If all you were trying to do is avoid estate tax, you would be pretty motivated to get it out of your estate. If you were worth $10 million, that could be a big mistake. If you are worth $100 million, it could be a small mistake,” he says.

Depending on an individual’s circumstances, advisors may recommend a charitable remainder trust, which provides income for the grantor and the grantor’s spouse for the rest of their lives, Wolper says. Another option is a charitable lead trust, which directs money to a charitable organization (such as a tithe to a church) for a set period before control reverts to the grantor’s heirs.

While they vary by estate, gifts usually include some constants. Gifts should include assets that will grow in value. “You choose an article that is appreciating in value because you want to give away something worth $5 million today and worth $6 million or $7 million in the future,” Mapes says.

In the past, real estate was the obvious choice, he says. But when the housing bubble burst, those gifts dwindled. Now that the market has cooled, the asset has room to grow again. Under these market conditions, it makes more sense to gift, say, a summer beach house to an heir, Mapes notes. “If a gift is appropriate, you start to look at the components that give the most bang for the buck,” he says.

Gifts come with some pitfalls. Too much gifting of liquid assets could back the giver into a financial corner that could have major repercussions for retirement. “You want to make sure you are not gifting too much. You want a projection of what you may need to keep your standard of living,” Gillespie says.


The introduction of portability changed the estate tax playing field for many couples. It more or less ensures the vast majority can use the full $10 million exemption. With any unused exemption passed to the surviving spouse, a family can be better buffered against the estate tax or losing critical assets. Portability’s addition was a common-sense change to protect surviving spouses, says Jason Eliason, a principal with Waller Financial Planning Group.

Previously, the standard trust when weighing an estate was the A-B trust, or marital trust, which splits the estate upon the death of the first spouse. While the surviving spouse has income from his or her portion of the trust, the decedent’s portion remains under lock and key.

Portability has reduced concerns about the loss of some of the exemption, Eliason says. “A family farm would be the big one in Ohio. People don’t think they’re wealthy and suddenly they have a non-liquid asset. With portability, that’s not as big an issue,” he says.

Previously, a couple could lose assets if they were improperly structured, Schuman says. Exemptions for husbands and wives were more stringent. “Historically, if you have a $3.5 million exemption and your wife had a $3.5 million exemption and she has no money, she loses her exemption when you die,” Schuman says.

Portability does come with limits, however: The remaining exemption goes away if the surviving spouse remarries, Wolper says.

2013 and Beyond

What will happen next year remains uncertain. If Congress does not take action, the estate tax exemption reverts to $1 million and a 55 percent tax rate.

Those on the cusp should review their estate plan with their attorney. People tend to undervalue their estates; most estimate their assets at about 70 percent of actual value, Mapes says. “The more important aspect is someone with $800,000 to $1 million cannot usually afford to give assets away. Most likely, they will be depleting assets as they age,” Eliason says.

There are already signals the $1 million exemption might not stick, but even if it’s around for 2013, most experts believe it won’t last. President Barack Obama’s budget proposal takes the exemption back to $3.5 million, but increases the maximum tax rate to 45 percent. O’Reilly says more modifications should be expected because the estate tax has evolved into a “political hot potato.”

Still, don’t expect any resolution prior to the presidential election. The estate tax could earn attention in the year-end lame duck session or in early 2013. There is even a remote possibility the estate tax could be eliminated as part of a compromise. “There is a ton of uncertainty. We’ve been living with uncertainty since we started down this path,” Schuman says.

Whatever happens, a new estate tax deal probably won’t get top billing in any tax cut or budget compromise. “Estate tax issues almost always get tacked onto another bill,” Mapes says.

Bill Melville is a freelance writer.

Reprinted from the May 2012 issue of Columbus C.E.O. Copyright © Columbus C.E.O.