Estate department: Inheritance tax changes likely to be retroactive

Congress won't act until the new year, planner predicts, then will turn back the clock

Nov 8, 2012 @ 12:04 pm

By Liz Skinner

estate planning
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Congress isn't likely to stop the $5 million estate and gift tax exemption from resetting to $1 million before New Year's. That doesn't necessarily mean, however, that clients only have seven more weeks to take advantage of this planning opportunity, a taxation expert said.

The estate tax component of the fiscal cliff probably won't be addressed during the lame-duck session because lawmakers are expected to focus on preventing tax breaks on income and investment taxes from expiring, said Thomas Pauloski, national managing director of Alliance Bernstein's Wealth Management Group. He spoke at the annual conference of the National Association of Estate Planners & Councils in Orlando, Fla., on Thursday.

Mr. Pauloski said he expects the next Congress to come up with less dramatic increases to the estate and gift tax provisions during its first nine months — and then make them retroactive to Jan. 1, 2013. Without congressional action, the inheritance tax rate will rise to 55% in 2013, from 35%.

“I think the next Congress will make it retroactive and come up with a compromise, such as a $3.5 million exclusion and a 40% estate tax rate,” he said.

Unfortunately, wealthy clients who want to lock in the current rates will likely find it's too late to complete any type of complex donation of illiquid assets, Mr. Pauloski noted. Appraisers around the nation are backlogged into next year, he said, and such legal documents take longer than seven weeks to prepare.

“I was an estate planning attorney," Mr. Pauloski said. "We move like glaciers."

Mr. Pauloski does recommend setting up an irrevocable grantor trust before the end of the year and funding it with the maximum $5 million for an individual or $10 million for a couple. The trusts should be funded with easy-to-value assets like cash and stock.

Next year, such a trust could buy assets that are more difficult to value — property, businesses and the like. The original $5 million in assets could go back to the client, he said.

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