As everyone knows, the election is finally over! After almost $6 Billion in combined advertising in House, Senate, and the Presidential races by the candidates, the parties, and independent groups, little has actually changed in Washington.
President Obama has been reelected. The electoral vote was 332 to 206.  The popular vote was 50% for President Obama and 48% for Governor Romney.  The Democrats have a slightly larger majority in the Senate.  The Republicans have a slightly smaller majority in the House.  Given this current climate of continued divided government, we have no clear view of where things may be headed concerning the estate tax and taxes, except that what we do know is that the estate tax laws on the books today are scheduled to “sunset” in 6 short weeks on December 31.  Without congressional intervention, federal estate and gift taxes stand to increase dramatically on January 1, 2013, affecting everyone who dies with an estate valued over $1 million.

Many of our clients think that only the super-rich need to worry about estate and gift taxes.  But they should think again. There has been no indication from Congress or the White House on whether, or what type, of final tax exemption number may replace the $1 Million exemption, if any, except for the usual chest thumping and saber rattling.

A Little Background

In December 2010, Congress passed a set of laws known as TRA 2010. These laws extended the Bush tax cuts until midnight on December 31, 2012.

Under TRA 2010, individuals with estates under $5.12 million are not subject to federal gift or estate tax. However, if Congress allows TRA 2010 to expire, estates larger than $1 million will become taxable at the beginning of 2013.

What Can You Do?

Outright Gift

One option is to gift a portion of your estate.  Between now and December 31 2012, an individual can gift up to $5.12 million (and a couple can gift up to $10.24 million) completely gift-tax free.  These gifts can be made directly to loved ones, like children, or gifted into trusts for the benefit of these individuals to protect the gifts from divorce and creditors.  This strategy is straightforward and works well if your clients are comfortable giving away a significant portion of their assets during their lifetime. But many clients are not willing to simply give away millions just to reduce their tax bill.

Spousal Lifetime Access Trust

Another way to preserve an estate is to lock in the current estate tax exclusion using a well-planned trust. Here’s an overview of how this strategy works:

• Clients put their money into a trust for their spouse or partner, removing those assets from their estate.
• The Client’s spouse or partner can act as trustee, making distributions to him- or herself, subject to certain restrictions.
•  The trust assets are available for the client’s spouse or partner to use and enjoy, but they are not included as part of his or her estate either.
•  Clients have the option to name their children or others as trust beneficiaries, as well.

For wealthy married clients, or those in a long-term relationship, the spouses or partners can even set up trusts for each other. Certain rules must be followed so that those trusts avoid the “reciprocal trust doctrine.”  A qualified estate planning attorney can explain how this is done. Using this strategy, your clients an shelter a total of $10.24 million, together with all the future growth on those funds, from estate taxes.

Timing is Everything

The clock is ticking. No one knows what Congress will do between now and the end of this year. One thing is certain: Clients have until December 31 to complete the planning and gifting necessary to benefit from what the law currently allows. It can take several weeks for an experienced estate planning attorney to complete the work involved in establishing a trust and transferring all the necessary assets, so clients should not delay talking to their attorney to choose a course of action.