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Tax, legal developments signal estate plan review

It has often been said the only constant in life is change.

Estate planning should always be considered an ongoing process. Financial and family situations are rarely static. Likewise, existing estate plans might be affected by changes in tax laws and trust or probate laws.

A person’s estate plan has many components. The principal components with respect to many individuals are how the individual’s assets are titled. That is, the beneficiary designations established by that individual with respect to assets, the individual’s will, durable power of attorney and health care directive, revocable or irrevocable trusts as may have been established by that individual and – if that individual is a business owner – the business succession plan established by that individual.

Because of the changes, incremental or major, in applicable family, financial, tax and legal circumstances, even comprehensive and flexible estate plans can become stale. Or, in the worst case, they can produce unintended legal and tax consequences and may even run counter to the individual’s wishes.

The American Taxpayer Relief Act of 2012 substantially increases the estate, gift and generation-skipping tax exemption amounts to $5 million per individual, adjusted for inflation. In 2013, the inflation-adjusted exempt amount for an individual is $5.25 million, or $10.5 million for a married couple, and the marginal rate is set at 40 percent.

ATRA also made permanent the concept of portability, a surviving spouse’s applicable exemption amount, with respect to estate taxes, to be increased by the estate tax exemption amount of the first spouse to die.

ATRA, along with the Affordable Care Act, also brought significant changes with respect to income taxes applicable to individuals, trusts and estates. Ordinary income and capital gains rates were substantially increased by ATRA. There now is a 3.8 percent Medicare contribution tax on net investment income.

In addition to these tax changes, in 2011 Missouri enacted legislation to permit qualified spousal trusts. A qualified spousal trust is a joint trust created by husband and wife. For asset protection purposes, the assets held by the trust are deemed to still be held by husband and wife as tenants by the entirety. Under Missouri law, an asset held by husband and wife as tenants by the entirety cannot be attached by a creditor of only one of the spouses.

Traditional estate planning sought to minimize estate taxes, often at the expense of income-tax planning and asset-protection planning. As a result of these recent changes in tax and other laws, estate taxes are now less of a concern, and income taxes

It should also be noted that 2013 is a good year for estate planning based not only on what happened in 2011 and 2012, but also what might happen after 2013. For individuals who still face estate tax issues, now is a great time to consider using available gift tax exemptions, in light of relatively low estate-planning interest rates and asset values.

President Barack Obama’s administration desires to eliminate a number of estate planning techniques that can be very useful for individuals who have estates in excess of the estate tax exemption amounts. Shifts in the current political environment could result in these proposals becoming effective, perhaps even as early as 2014. With respect to this issue, the old adage – he who hesitates is lost – may be appropriate.