Money tips: Ensure your estate plan by reviewing for tax law changes

Bill Scruggs
Friday, Jul 6, 2012

Tax changes enacted in 2001 and 2010, hereinafter called the “Tax Relief Act of 2010” brought forth complex tax law changes that may impact a number of areas within a person’s financial plan. One such area is estate planning. Although estate planning is fundamentally about controlling personal assets while passing them to heirs, most people would associate this with not paying or minimizing the estate tax. For this very reason, it is important for an individual to review their estate plan to ensure they are able to fully take advantage of the tax law changes.

One of the most significant changes within the tax law was the increase in the amount of assets each person can transfer free of estate and gift tax. This exemption is currently $5 million but will return to $1 million on Jan. 1 unless Congress acts to change this result. The Tennessee Legislature has passed legislation to phase out the Tennessee Inheritance Tax. In 2012, the exemption amount is $1 million and will increase each year until 2015, when it will be $5 million. Effective 2016, the tax is completely repealed.

The Tax Relief Act of 2010 also introduced the concept of “portability” of the exemption amount between married persons for 2011 and 2012. “Portability” means that if the first spouse to pass away doesn’t use their $5 million exemption then their exemption carries over to the surviving spouse who will then have up to a $10 million exemption that may be used to shelter assets from the estate tax. The concept of “portability” will expire at the end of 2012.

Given these changes, another area within your current estate plan that may be reviewed in order to take full advantage is gifting. Gifting allows an individual to transfer assets from their estate to their heirs while they are still alive. For most individuals, however, the transfer will take place at their death. A person’s will facilitates this transfer and, thus, is another area that should be reviewed. Because the gift tax exemption is subject to change by Congress and under present laws reverts to $1 million in 2013, instead of quantifying a specific dollar amount in your will, it could be changed to incorporate formula language. Formula language will allow an individual, upon their death, to fully take advantage of the applicable exclusion amount no matter when they die. The Tennessee Legislature recently repealed the Tennessee gift tax effective for gifts made on or after Jan. 1, 2012.
A common substitute for a will that many people opt for is the living trust. The living trust not only serves the same function as the will but may provide additional benefits such as professional management of assets along with circumvention of the probate process upon death. Therefore, a living trust should be reviewed in the same manner as a will.

Of course, this brief article is no substitute for a careful examination of all of the advantages and disadvantages of this matter in light of your unique personal financial circumstances. Before implementing any estate planning strategy, contact and consult with your financial advisor, estate planning attorney or tax professional.

Editor’s Note: The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Paul Valery and not necessarily those of RJFS or Raymond James.

Bill Scruggs is a financial advisor and co-branch manager of the Raymond James Financial Services office in Cookeville, located at 430 N. Washington Ave, Suite A. Scruggs can be contacted at (931) 520-0778 or online at www.raymondjames.com/bscruggs.