How Do the Sunset Provisions Affect Me?

If you’re like most folks, you’ve heard about the sunset provisions, but don’t know how they will affect you.  No worries.  You’re not alone and this article will give you an overview.  That being said, any educational information is limited to explaining general principles and concerns.

To find out the nitty gritty details of what may happen to your family and your estate in 2013, consult with our qualified South Jersey estate planning attorney Charles Bratton.  You are welcome to contact our Haddonfield office to schedule an estate planning consultation.

What is a Sunset Provision?

Most laws continue until they are changed by the legislature; however, some laws such as the current estate and tax related law (aka “Bush Tax Cuts”) end on a certain date, unless Congress takes action to continue the law.   The Bush tax cuts were extended by President Obama and are also known as “The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act” (aka “TRA 2010”).

The current federal estate tax exemption of $5 million and the long term capital gains rate of 15% both sunset (end) on December 31, 2012.  There are additional provisions that will change as well but those are the two that are the most concerning.

However, please do ask your South Jersey estate planning attorney about changes in:

  • Gift Taxes
  • Exemption reduced from $5.12 million to $1.4 million
  • Tax rate increased from 35% to 55%
  • Generation Skipping Taxes
  • Exemption reduced from $5.12 million to $1.4 million
  • Tax rate increased from 35% to 55%
  • Portability (elimination of).

The $5 Million Federal Estate Tax Exemption Sunsets and Rates Increase by 20%

Oddly, if all stays the same, the 2012 $5.12 million exemption reverts back to the 2006 limits.  This means that Americans will only be able to pass $1 million to non-spouse loved ones without incurring the wrath of the federal estate tax.

The reduction in the federal estate tax exemption and the increase of federal estate tax from 35% to 55% are both highly significant and will affect many families. 

  • Example 1:  Kimberly dies January 1, 2013 and passes $2 million to her children at her death.  Under current law, there will be $500,000 of federal estate taxes.
  • Example 2:  Fred dies March 15, 2013 passes $5 million to his sister and children at his death.  With the current law of only $1 million exclusion, the taxes would be $2 million.

Fortunately, if you consult with a qualified estate planning attorney and get a proper estate plan in place, federal estate taxes can be minimized or eliminated altogether.  If you don’t plan, your family will pay the tax.

Most folks don’t realize that the federal estate tax will apply to them – and, unless Congress takes action before the end of the year, it will apply to many American families.  Add up all of your life insurance, real estate, retirement accounts, savings, investments, and the like.  If you and your spouse have more than $1 million, in 2013, the federal estate tax will take about 50% of everything over that $1 million limit.

The federal estate tax is a transfer tax on everything you own at your death that goes to anyone other than a spouse or a charity.  Because of the Defense of Marriage Act, there is no federal recognition of same-sex marriage and, therefore, no unlimited marital deduction for lifetime gifts or at death transfers.

The 15% Capital Gains Rate Sunsets (ENDS)

Short-term capital gains are investments that are held for one year or less; they are taxed as ordinary income in 2012 and will continue to be taxed as ordinary income in 2013 if the current law is allowed to sunset.

  • There will be a huge change in long-term capital gains rates.  This year (2012), the rate is 15%; in 2013, the rate will be 20%.
  • In addition, in 2013, qualified dividends will be taxed as ordinary income as high as 39%.  This is a change of 15% tax to as high as 39% tax, if the current tax cuts expire.

 What Uncertainty Means for You and Your Family

Nothing is likely to happen before the election on November 6, 2012.  In fact, of this writing, Congress is adjourned to go home and campaign for the election.  Whether Congress will act before the end of the year is unknown to all experts.

The best thing you can do now is twofold:

  • Meet with your financial advisor or CPA to plan now in case the capital gains rates do increase.
  • Meet with our qualified estate planning attorney to make sure that your estate plan is up-to-date and flexible enough to handle both contingencies – that the estate and tax related laws will be permitted to sunset or that Congress will take action and either extend or update the law.

Where to Find Help Understanding the Sunset Provisions

You are always welcome to contact our office to schedule a consultation.  We’ll analyze your family and financial situation to make sure you are covered for possible coming changes in the law.  Call our South Jersey Haddonfield office today at 856-857-6007.