The fiscal cliff. The fiscal cliff. Once more: the fiscal cliff. It's on everyone's lips lately, and political leaders in the U.S. are working to avoid it. As for a comprehensive solution, predictably Republicans and Democrats disagree. But there is one major aspect of President Obama's proposal that has some members of his own party bristling: the idea of raising the estate tax.
Say you have a second spouse, and you want to ensure that he or she receives a significant amount of your estate after you die. Seems simple enough, right? Just include in your will the amount you want your spouse to inherit.
Our readers have probably heard the talk about the coming fiscal cliff in Washington. For those who are unaware of the debate, it basically involves the cumulative effect of various laws that would result in tax increases and spending cuts if left unchanged. The focus of much of the debate has been on income tax, but estate and gift tax exemptions are also implicated. Where
Mitt Romney, in an effort to garner support from farmers in the Midwest, promised to abolish the estate tax earlier this week during a campaign in Iowa. As our New Jersey readers may know, the Bush-era tax cuts are set to expire at the end of the year, and there has been a bit of a scramble to take advantage of the unusually high exemption amount, which is currently at $5.2 million. In 2013, the exemption amount is set to drop to $1 million.
In our previous post, we began looking at a case in which a court ruled to be invalid a trust amendment executed shortly before the death of a woman. That trust setup, as we noted, contained a formula clause intended to utilize the full exclusion amount and minimize estate taxes.
A recent probate case out of California demonstrates the importance of foresight in estate planning. In that case, a couple had set up a trust in order to minimize estate taxes, and made use of a device called a formula clause, which allows typically divided the estate so that their children would get the amount of assets in the federal estate tax exclusion, with the rest going to a marital trust for the surviving spouse. The purpose of this arrangement is to allow the full exclusion amount to pass to heirs tax-free.
Same sex couples in New Jersey, while they do have some of the same advantages as heterosexual couples, face unique challenges and issues that heterosexual couples do not. One example of this is that New Jersey, as our regular readers know, imposes an estate tax where the value of a deceased person's estate exceeds $675,000. Generally speaking, gifts to a surviving spouse are fully deductible for purposes of New Jersey estate tax. This is known as the unlimited marital deduction.
The unlimited marital deduction allows married persons to pass on as much of their wealth as they see fit, free of estate taxes. Taxes will eventually have to be paid on the property once the surviving spouse dies. There are, of course, a number of estate planning techniques that help couples to make the most out of their money while minimizing taxes.
In our last post, we took a look at the Intentionally Defective Grantor Trust as a technique for minimizing estate and gift taxes. Another technique, also trust-based, is the Grantor Retained Annuity Trust (GRAT). GRATs can allow those who establish them to transfer a significant number of assets with minimal or no estate and gift tax.
As we have mentioned on this blog in the past, the federal estate tax exemption amount, which is currently at $5 million through the end of this year, is set to decrease to $1 million if Congress takes no action. That means that, in 2013, those who die with estate with a value in excess of $1 million will be subject to federal estate taxation.