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any advisors are in full rescue mode as they warn their clients about an even deeper peril than the dreaded fiscal cliff. It’s the estate tax cliff and could cost families millions of dollars unless they protect themselves. The estate cliff refers to the steep precipice of estate tax liability that will emerge under laws that take effect in 2013. This is but one component of the much-talked-about fiscal cliff, which is the burst of tax hikes and spending cuts scheduled for start-up in 2013 unless Congress intercedes. Relatively few public figures have been talking about the estate tax cliff during this year’s election season. Perhaps they believe the topic is not of broad enough interest to the general population, since estate taxes are often seen as a subject of most concern to the super-wealthy. If that is the case, they could be seriously mistaken. According to calculations from LIMRA, 14.5 million U.S. households, or 12.5 percent, could become subject to estate tax liability under the estate tax law that goes into effect on Jan. 1. By comparison, just 2.4 million, or roughly 2 percent, face potential estate tax liability under today’s estate tax law, the researcher says. That’s a sizeable jump in exposure – a little more than 504 percent to be exact. That single tax change could sweep higher income mid-market Americans into a world of estate taxes and estate tax planning that may have seemed as far away as the sky. It would increase the tax liability of the wealthy as well. That gaping exposure represents an estate planning opportunity for advisors, but it also represents potential professional liability issues if advisors do not inform clients that the exposure exists. To say that advisors are both interested and concerned is an understatement. Some interested parties in Washington have been hoping Congress would pass new legislation that is less taxing, so to speak. Proposals range from a temporary extension of the current estate tax law during this year’s lame-duck session to enactment of retroactive legislation early next year. But to date, no such luck. That is why advisors are making a last-minute effort to reach out to Amer-


The Big Jump: Estate Tax Levels for Individuals Year

Exclusion Amount

Top Marginal Tax Rate


$5 million



$5.12 million



$1 million


* Established by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010; it will sunset at the end of 2012. ** Scheduled to take effect unless Congress enacts new estate tax laws.

icans who could be affected by the 2013 law as it now stands.

The Trigger

The trigger for all of this is the pending sunset of current estate tax law on Dec. 31. The next day, federal estate tax levels will revert back to those in effect in 2001. This means that estates of individuals who die on or after Jan. 1 can exclude only $1 million from federal estate taxes ($2 million for married couples), and they will be subject to a 55 percent top marginal tax rate for values over this exclusion amount (also called the exemption amount). That’s a far cry from today’s very generous exclusion amount of $5.12 million and a much lower top tax rate of 35 percent. In everyday terms, an estate of a person who dies in 2013 with, say, a net estate value of $2 million could have $1 million excluded from the estate taxes, but then see the remaining $1 million reduced by up to 55 percent. Larger estates would have to pay even more in estate taxes, of course. By comparison, that same estate, if the person dies in 2012, would pay no estate taxes at all. Today, that person’s estate would have to be valued at more than $5.12 million before estate taxes kick in at all, and the top tax rate would be 35 percent, not 55 percent.

People who today cannot imagine themselves as having an estate worth more than $1 million might shrug off this tax shift as “not-important-to-me.” That is a problem, say advisors, because many people may be underestimating the value of their estates. An estate includes not only the value of one’s financial assets (banking, brokerage, etc.), they point out, but also the value of other assets such as real estate, a small business, group life insurance, and individual life insurance. Add it all up and you don’t have to be wealthy to have an estate of over $1 million, says Bernard R. Wolfe, an advisor and financial planner at Bernard R. Wolfe & Associates, Chevy Chase, Md. Some people are getting three to four times their annual salary in group life insurance, he points out, and they have individual life insurance, too. “But they don’t know that the insurance will be included in their estates.” Likewise with clients who live in parts of the country where property values are high, such as California and New York City. “In many of those locations, even small homes sell for $700,000 to $800,000,”says John Azodi, a certified professional accountant in Kansas City, Mo. The home value combined with other assets could put their estate value well over the $1 million exclusion amount for individuals ($2 million for couples).

November 2012 » InsuranceNewsNet Magazine 19

November 2012  
November 2012  

The Estate Tax Cliff - New 2013 tax hikes and spending cuts could cost families millions