Much Ado About Nothing?

Last week, I was lucky enough to see the cliff up close. Not the fiscal cliff that kept us all riveted (or not) for the month of December, but a beautiful snow covered cliff. And it got me thinking: was the fiscal cliff all much ado about nothing?

From an estate planning perspective, perhaps it was. For the vast majority of Americans, our estate planning and tax planning needs have not been significantly changed by the passing of the American Taxpayer Relief Act (ATRA).   Yes, ATRA raised estate and gift tax rates from 35% to 40%. But on the bright side, the Act made the rate permanent (no sun-set provisions!), providing visibility for planning. It also made permanent the $5 million exemption indexed to 2011; which means that in 2013 it is $5,250,000. Another permanent feature that lends predictability is the extension of portability, which allows a surviving spouse to use any unused portion of their late spouse’s exemption. This allows married couples to maximize the collective use of their combined $10+ million in federal estate taxation exemption, and is very helpful in state with exemptions less than the federal exemption.

Aside from predictability, however, not much has changed on the federal level. This is why I wonder if it was much ado about nothing: the real work for estate planners is the planning for all of our clients. Most of us are far below the (now permanent) federal taxable rate.

What planning? Here in Minnesota, there is still tax planning to do.  Minnesota’s estate tax kicks in at $1 million (and there is no federal state death tax credit). With home values rising again and other real estate values increasing as well (have you seen the prices for farm land lately!?) many Minnesotans have taxable estates. There is income tax planning to be done as well –higher income tax rates may impact strategies on when to time distributions from qualified plans or social security.

Of course estate planning is not just about minimizing taxes. Before ATRA and after, it is about asset management during all stages of life to ensure that your accumulated assets have the maximum and desired benefit once you are no longer around to direct where they go. Succession planning (for the family farm, cabin or business), charitable giving and providing for loved ones remains the core of the planning estate planning attorneys do. While last month’s Fiscal Cliff has been averted and tax planners are cheering for some level of predictability, there remains plenty of hard work to be done – work not necessarily driven by federal taxes — making decisions on how to achieve individual objectives. Perhaps the biggest benefit of almost pitching over the Fiscal Cliff is the awareness it has raised about estate planning and the actions we are all taking to start planning.