If you thought the area of estate planning had reached calmer waters after President Obama’s recent deal with Congress, think again.  The American Taxpayer Relief Act (ATRA) signed into law by President Obama earlier this year locked in the individual estate tax exemption of $5.25 million for individuals and $10.5 million for married couples (indexed for inflation) for the foreseeable future.  As a result, very few people will be impacted by the estate tax.  On the other hand, top income-tax rates have risen to more than 43% for some people.

A recent article appearing in the Wall Street Journal detailed some of the new strategies in estate planning.  Some trusts that used to be crucial in planning around the estate tax, including the qualified personal residence trust and the credit shelter trust, are now out of favor.  This is especially true if a person is worth less than $3.5 million and has little prospect of crossing the $5.25 million threshold.

In place of trusts, high net-worth individuals are being encouraged to make intra-family loans to children in lower income tax brackets.  The IRS sets the rates for these loans and they are currently very low.  If the loan funds are used by the children for investments, any income produced is taxed at the children’s lower rates.  This strategy can be an effective tax-savings measure even if an individual or couples are over their respective estate tax exemptions.

Another strategy involves income tax-deferred retirement plans, including Roth IRAs and 401(k) plans. On top of the traditional tax saving advantages of these plans, the new 3.8% Obamacare investment surtax does not apply to these distributions. Contact an estate planning or tax attorney at McCleskey to discuss issues related to The American Taxpayer Relief Act.