Tax Laws and Estate Planning

Estate planning continues to evolve as federal and state laws change over time. A recent Financial Planning article highlighted the significant impact of the fiscal cliff tax deal on the world of estate planning.

  One of the hallmarks of the tax deal was making the estate tax $5.12 million exemption permanent. Furthermore, the exemption is now adjusted with inflation, and is now portable between spouses. The practical effect of these changes is that the vast majority of individuals, except those with extreme amounts of wealth, will never fear the federal estate tax again.

For most Americans, tax cuts enacted in 2001 have now become permanent, which means that their tax rates will continue unchanged. For wealthier individuals, however, income taxes may be significantly higher. For instance, Congress has developed a new 20% tax rate on dividends and capital gains. A 3.8% Medicare tax will apply to investment income. Additionally, itemized deductions and personal exemptions will now phase out at incomes of $250,000 for single individuals and $300,000 for married couples who file a joint income tax return. It is estimated that in some cases, individuals could face a combined tax rate of more than 50%.

Fortunately, careful estate planning may be able to alleviate some of these higher taxes for wealthier Americans.  While this goal often may be achieved, it can be a complicated process that may require estate planning attorneys, clients, and investment advisors or trustees to coordinate their actions so as to avoid any costly moves.

Charitable giving is another way that individuals may be able to avoid some increased taxes. Although the itemized deduction for charitable giving does phase out at higher incomes, the deduction could still be used to offset at least some gains. Some of these benefits also may be realized through the use of charitable remainder trusts, to which the new Medicare tax does not apply.

These are only a few examples of ways in which some of the new taxation can be eliminated or at least minimized. Of course, individuals also need to mindful of state estate tax requirements, which may also significantly impact their estate planning techniques. Due to the complexity of these new laws, it is essential that you consult with an experienced Illinois estate planning attorney. Contact your Wheaton estate planning lawyer today for a comprehensive evaluation of your estate planning needs and goals, and the assistance that you need in making those goals a reality.

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