Changes to the tax law in 2012 are changing the way people should be planning their estates. There are many, however, who are not aware of the extent to which these changes require a new approach. The main effect of the 2012 law is that income taxes have become a higher burden than estate taxes. Additionally, as an individual’s income rises, their tax burden increases. The top tax rate has increased to 39.6%. Qualified dividends and long-term capital gains have increased to 20%. A new Medicare tax of 3.8% on investment income has been imposed by Obamacare. Itemized deduction and personal exemption phase outs have been restored.
Estate planning can be a means of reducing income taxes. It is now important to coordinate estate planning with an individual’s income tax situation. Estate planning strategies can be an effective way to reduce the income tax burden. Following are some areas to consider.
Historically, permanent life insurance was used to help pay for estate taxes. There are new ways to use life insurance that can be more profitable. Permanent life insurance can be used as an investment. The earnings of a policy’s cash value will compound tax deferred for as long as they remain in the policy. Additionally, after the earnings have compounded for years, tax free loans can be taken from the cash value.
Charitable gifts have changed under the new tax law. For some people, the tax benefits of charitable gifts have been reduced. Charitable remainder trusts remain valuable. Lifetime gifts also need to be reconsidered. The higher exemption means that less people need to remove large assets from their estates.
Individuals who have questions about the 2012 tax law may want to seek the advice of an attorney that specializes in estate planning. An attorney may be able to explain the new tax law and help plan an effective strategy that takes the best advantage of the new law.
Source: Investing Daily, “How estate planning is changing.“, Bob Carlson, June 07, 2013