The Importance of Estate Planning in 2012

As families approach the concept of transition, the year 2012 provides a rapidly closing window allowing individuals to enjoy tax exempt gifts of up to $5.12M per person – meaning parents can gift a total of $10.24M to their heirs without filling the government’s coffers.

For families wishing to take advantage of this time sensitive offering, CNBC offers the following four actions:

  1. Start Now:  Given the nature of estate planning and valuation, the process can take months to complete.  Though it’s only mid-year, as more individuals seek estate-planning council the longer it will take to complete.  To ensure you’re not left behind, take action now to get the process started.
  2. Understand and Use Trusts Properly:  A trust can guard and preserve a family’s wealth by keeping the assets protected and separate from the individuals.  To protect your wealth for the next generation, a properly structured trust is necessary to guard the wealth against frivolous claims against the individuals in the receiving generation.
  3. Plan for the Future:  Considering the potential for this tax to expire outright at the end of 2012, families that avoid proper estate planning and do not take advantage of this opportunity stand to lose up to 50% of their gift to estate taxes.  Such a sizeable chunk is tough to swallow at the onset of the tax, but consider the implications twenty years out – how much better off are your heirs with that additional 50% invested in a trust rather than provided to the government?
  4. Overall Uncertainty:  Between the nature of 2012 as an election year, combined with the slow bi-partisan law making process – it stands to reason that this tax will likely expire at the end of this year.  Do not hold off thinking that the tax will easily be extended – do what’s best now and take action that could affect your family for a lifetime.

Reiterating the fourth point, CNBC predicts that the tax-free gift amount will lower to somewhere closer to $1M, meaning that to delay in planning for this tax-free window could cost families millions in estate taxes.

Finally, just because a tax-free window exists does not mean that families should over extend themselves to take advantage of the opportunity.  For families that need to live on their current assets, gifting too early could be a damaging move.  A note of caution:  carefully think out the consequences of gifting shares in the family business to members of the next generation who may not be working in the business.  Not all decision making should be driven by saving taxes.  Many families have gifted aggressively to the next generation to avoid taxes only to have the next generation have to buy back shares in the business to gain control. Though there are risks, at a minimum this generous tax exemption should spark discussion among family members – as the year continues to progress, families have less time to plan and therefore greater risk of missing the window of opportunity.

For further reading on this topic, consult CNBC at:

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