As of January 1, 2012, the federal unified credit has been adjusted for inflation, raising the amount of assets that can pass tax-free at death to $5,120,000. This credit will be in effect for anyone dying in 2012. In addition, the lifetime gift tax exemption has been increased to $5,120,000, thus allowing the making of additional gifts which are free from both federal and New York State tax. The annual gift tax exclusion--the amount that one can gift to any person(s) during the year without having to file a gift tax return and without the gift reducing the available unified credit--remains at $13,000.

While the increase in the federal unified credit is great news, the legislation which created the increase is set to expire at the end of 2012. If Congress takes no further action, the unified credit amount will revert to $1 million. Moreover, one must keep in mind that a number of states, including New York, impose their own form of estate tax. In New York the exemption amount for estates is only $1 million and, under existing law, cannot be shared by a married couple; therefore, a by-pass trust or credit shelter trust or similar estate planning tool is still necessary. Anyone with assets over $1 million who resides in New York still needs to do some comprehensive estate planning in order to avoid unnecessary taxes.

Adverse changes are occurring in connection with long-term care planning. In September, 2011, The New York State Department of Social Services (“DSS”) promulgated new directives, greatly expanding their power to recover medicaid dollars paid on behalf of an individual who is now deceased. Whereas previously DSS would merely file a lien against the probate estates of those who received medicaid benefits while they were alive, they can now recover against joint accounts, life estates, annuities, and even revocable living trusts. In fact, DSS may be able to obtain limited reimbursement from certain irrevocable trusts. What this means is that the only effective way of protecting ones assets from long-term care costs, besides obtaining long-term health care insurance, is to make outright gifts or establish irrevocable trusts.

As a result of the ongoing changes in the estate and gift tax laws, it is imperative that everyone periodically review their estate plan. If one has an interest in reducing their estate tax liability, it would certainly make sense to do some aggressive gifting before the end of 2012. For those concerned about long-term care planning, now is the time to obtain long-term care insurance and establish irrevocable trusts to protect valuable assets.

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IRS Circular 230 disclosure: We inform you that any tax advice contained in this communication is not intended or written to be used, and may not be used by your or anyone else for the purpose of avoiding penalties imposed under the Internal Revenue Code.