Looking Back on the Fiscal Cliff: An Estate Planning Wake Up Call


In December, 2012, clients and estate planners alike were frantic with trying to complete pre-fiscal cliff planning to, among other things, lock in the 2012 Federal estate and gift tax exemption of $5.12 million.  As we counted down to the New Year, there was sheer uncertainty as to the impact of the fiscal cliff on the estate planning community.  Where was the Federal estate and gift tax exemption going to fall to?  Would portability continue or terminate at year end?  What would tax rates be?

All of these questions and more led many estate planners, including me, to advise clients to take  measures prior to January 1, 2013 in order to set up the necessary irrevocable trusts and charitable gifting vehicles in order to lock in the previously mentioned Federal estate and gift tax exemption.  Hours of client meetings, valuations, drafting documents and signings created an environment of “organized chaos”, in order for us to complete our goals prior to year end.  So as we step back now several days removed from the New Year, what is the aftermath?

What we know is that estate planners were left with no choice but to engage in comprehensive 2012 year end planning at a fast pace.  However, with the deal reached by the Congress on New Year’s Day, those of us who expected inevitable change to the Federal estate and gift tax exemption will have to wait longer as the current exemption, indexed for inflation ($5.25 million) was extended indefinitely.  Despite this extension, the fear of the fiscal cliff can be viewed as a good thing.  For many, this was a wake-up call to begin or amend their estate plan in order to maximize the benefits of their wealth transfer planning.  Many engaged in necessary estate planning that, without the fear of the fiscal cliff, may not have ever been completed.  Yet, while the frantic and frenetic year end planning was not for naught, we will have to wait longer for the changes to take affect for which this planning was aimed to combat.

Even with the Federal exemption remaining the same, much of the planning done at year end will either (i) protect assets from creditors or bad marriages or (ii) keep appreciation of assets out of the reach of Federal estate taxation.

Of note, there were some expected changes that did result from the new legislation.  The top Federal tax rate for ordinary income will increase from 35% to 39.6% and the tax rate for long-term capital gains will jump from 15% to 20%.  In addition to the long-term capital gains tax increasing, a new 3.8% net investment income tax (as part of the new health care law) will be imposed on high income earners resulting in a top tax rate on all long-term gains of 23.8%.  Federal Transfer taxes have increased from 35% to 40% on estates and gifts in excess of the estate and gift exemption upon an individual’s death.  Finally, the concept of portability, which has been explored in recent blogs, will be here to stay as the new legislation makes this concept permanent.

As we continue to learn the fallout from the Fiscal Cliff legislation, we will continue to learn more regarding the future impacts of these measures.  However, this gives individuals a continued opportunity to lock in current estate and gift tax rates by engaging in proper planning before any further action is taken by the legislature to change the current estate and gift tax exemption amounts.  It is important to view the Fiscal Cliff scare as a wake-up call for all to engage in comprehensive estate planning.  Time is always of the essence as laws can change at any time.  For now though, we continue to wait!

–  Gary Altman, Esq. and Adam Abramowitz, Esq.

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