Estate Planning Considerations in Light of Changes in Federal and Ohio Tax Law

By: Lisa J. Roth, Esq.
Ziegler Metzger LLP
216-273-6726; lroth@zieglermetzger.com

As you know by now, the American Taxpayer Relief Act of 2012 (ATRA) was signed by President Obama on January 2, 2013. The word "relief" in the title of that Act is certain to have different meanings to different people, but as an estate planner, I can tell you that I take relief in the fact that there are now permanent laws in place that provide guidance for estate and gift planning for my clients. Estate planning has been uncertain the last few years because there were so many questions that had no answers. Thankfully, ATRA has provided answers to those questions.

If we had gone over the fiscal cliff, both the federal estate and gift tax exemption amounts would have gone back to $1 million and the tax rates would have increased to 55 percent. However, as a result of ATRA, the federal estate and lifetime gift tax exemption amounts are now unified at $5 million to be indexed annually for inflation ($5.25 million in 2013). That means if an individual dies with a gross estate less than $5.25 million in 2013, there is no federal estate tax imposed on his or her estate. It also means that an individual can make gifts up to the exemption amount during his or her lifetime without incurring a gift tax. Additionally, the estate and gift tax rates are unified with a maximum rate of 40 percent. ATRA also made permanent "portability" between spouses. Therefore, if an individual dies after 2011 without using his or her full estate and lifetime gift exemption amount, the surviving spouse may be able to utilize the unused portion to make gifts. In other words, using the 2013 exemption amount, a married couple may shield up to $10.5 million from federal estate tax.

While we have all heard a great deal about federal taxes the last several months, the state of Ohio also passed legislation in 2012, which has had a major impact on estate planning. Effective January 1, 2013, the Ohio Estate Tax (OET) is repealed. Therefore, there will be no estate tax on estates of Ohio residents (or non-residents with property in Ohio) who die after December 31, 2012. Prior to this repeal, individuals with a taxable estate of $338,333 or more were subject to the OET which had a maximum rate of 7 percent.

Since there is no OET and the likelihood of no federal estate tax because of the high exemption amount, many people may think there is no need to have an estate plan. However, there are many other reasons to have an estate plan. The foundation of any plan is a will, which is a legal document that states how you want your assets distributed after your death. A will also allows you to appoint an executor to administer your estate pursuant to your wishes as well as guardians for minor children. Without a will, you lose control of these decisions, which can lead to unintended consequences, unnecessary expenses and discord among family members.

In some cases, a trust may also be an essential part of your estate plan. In addition to tax planning, trusts can be used to avoid probate, provide privacy, protect heirs and control distribution of your assets. Without a trust, your estate may be subject to probate administration, which can add costs and delay to the administration of your assets. Furthermore, probate proceedings are public record. Trusts are private documents. Trusts also allow you to protect heirs as well as control how and when your assets are distributed. For example, if you have minor children, disabled beneficiaries, or if there are creditor issues or concerns about a beneficiary receiving his or her inheritance all at once, you can use a trust to place conditions upon how and when distributions are to be made. Trusts can also be useful in protecting your children's inheritance in cases involving a second marriage or to ensure that there are assets remaining for your children after the deaths of both you and your spouse.

Your estate plan should also include a durable power of attorney. This is a document in which you authorize another person to act as your agent to do things such as manage your assets, pay your bills and other similar functions if you are unable to do so while you are living. The creation of a power of attorney can also avoid the need to have a court appoint a guardian for you if you are deemed incompetent. It is extremely important that the individual you designate as your agent is someone who is competent and trustworthy. A living will and health care power of attorney are also important to include in your estate plan. These documents allow you to state your wishes with regard to medical decisions if you are deemed to be in a terminal condition or permanently unconscious state and to designate an agent carry out those wishes on your behalf.

While changes in the federal and Ohio estate tax laws have significantly impacted estate planning, they have not eliminated the need for planning. An effective plan will ensure that your goals are met and will provide your loved ones with direction and peace of mind during a very difficult time.