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Changing Estate-Planning Rules Require Careful Consideration

By Grace Ghezzi


Is your estate plan current? The federal estate-tax rules drastically changed in 2010, were altered again in 2011, and will change

again in 2013. Following is a summary of these laws. I encourage you to review your own estate plan to see how it is affected.

Our federal estate-tax exemption, which is the amount you can pass estate-tax-free at your death, was $3.5 million in 2009, and the maximum federal estate-tax rate was 45 percent. In 2010, the estate tax was repealed. For this one year, the step-up in basis rules (which would allow heirs to sell assets they inherit with a cost basis equal to the estate fair-market value) were replaced by carryover basis. These new rules permitted a step-up of $1.3 million plus an additional $3 million for assets passing to a surviving spouse. In lieu of these rules, an election could have been made in 2010 to elect an estate-tax exemption of $5 million and a full step-up in basis.

In 2011, the federal estate tax ex-emption was $5 million with an estate tax rate of 35 percent. For the 2012 tax year, the exemption is $5.12 million. During this entire time, there is an unlimited federal and New York State marital exclusion, and the New York State exemption is $1 million. The 2013 federal exemption is scheduled to decrease to $1 million with an estate-tax rate of 55 percent. With these wild swings in federal estate tax, it’s hard to structure your estate plan wisely. Although everyone’s circumstances are different, here are some general guidelines.

It’s important to list your assets at fair-market value, and include the death benefit of your life insurance that you own in the total. Once the fair market value approaches $1 million, tax planning is imperative. 

For married couples, equalizing your estates may result in the lowest estate tax. Putting disclaimer or credit-shelter trusts, which maximize the use of both spouse’s exemptions, in your wills could double the amount passing free of estate tax for a married couple. If you have a formula clause, you should review it. Depending on the estate-tax exemption amount in the year of your death, it could potentially disinherit the spouse if the tax-exempt amount is left to children and the balance to your spouse. 

Making gifts of real estate or closely held business interests may be wise, and valuation discounts as well as low interest rates work in your favor. Gifting appreciating assets during your lifetime and placing life insurance into an irrevocable life-insurance trust could leverage your exemption even more. Reviewing beneficiary designations and coordinating them with your overall estate plan is of prime importance, since many people pass more assets by beneficiary than by their wills. Flexibility is key, with the fluctuating exemptions, basis rules, and estate-tax rates.

Durable powers of attorney, health-care proxies, and living wills are lifetime documents that everyone should have in place. A durable power of attorney states who would make your financial decisions, and a health-care proxy designates who would make your medical decisions, if you were unable to do so. HIPAA language should be included in your documents so that the privacy laws allow your agent access to your personal information. A living will states that you do not want to be kept alive by artificial means if you are in an irreversible coma with no chance of recovery, and if that mirrors your wishes, you should sign a living will.

Are you confused yet? Congress may adopt new legislation for 2013. Uncertainty makes it difficult to plan, but waiting to see what happens next may not be the best course of action. The earlier you implement flexible tax and estate planning to respond to these changes the better. This article just scratches the surface. There are many rules not shown here that you would need to consider.               

Grace Ghezzi is vice president with Benefit Consulting Group (or BCG), specializing in fee-only financial planning. Contact her at (315) 413-4460 or via email at


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