New Estate Tax Law – The Gift that May Not Keep on Giving

By Barbara Coenson
Attorney at Law

The dramatic increase in the federal estate tax exemption to $5 million is a holiday gift that gives more to loved ones and less to government. But, the gift is not necessarily one that will keep on giving. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed into law on December 17, 2010, is hailed as an eleventh hour savings of potential tax dollars that could have come due from the estates of those who will die in years 2011 and 2012.

When someone dies, an estate tax is levied on the property that passes to loved ones other than a spouse; however, the federal estate tax exemption of $5 million is an amount that can be passed without tax liability.

For example, John dies in 2011. He leaves his entire estate of $3 million to his children. Under the new law, John’s estate will not pay estate taxes because the $3 million is below the estate tax exemption amount of $5 million.

But the new law, which also decreases the estate tax rate to 35%, sunsets after 2012 and, unless Congress acts before then, the estate tax exemption will decrease to $1 million with a tax rate up to 55%.

If John dies in 2013, without another law passed by Congress, then $2 million of John’s estate could be taxed up to 55% leaving less inheritance for John’s children.

Although the new law is effective for only two years; it does bring opportunity to save on taxes and give more to loved ones. Here are some highlights of the new law.

The Gift of 2010

Year 2010 was an estate tax-free year. It also was a year without a stepped-up basis on inherited property which increases potential capital gains tax liability when the property is sold by the person who inherited the property. The new law offers a retroactive choice for the estates of those who died in 2010. Based on what is deemed most favorable for beneficiaries, the administrator of such estates can elect to either 1) pay a 35% estate tax on the value of all estate property that exceeds the first $5 million exemption amount and establish the estate’s property base value at its worth on the date of death; or 2) pay no estate tax and receive the estate property with a modified carryover basis that allows an increase in the basis value of $1.3 million, plus an additional $3 million for property that passes to a surviving spouse.

The Gift of Portability

Starting in 2011, a surviving spouse can add the unused estate tax exemption of a predeceased spouse to increase the amount a surviving spouse can pass estate tax-free at the surviving spouse’s death.

For example, Tom dies in 2011 leaving $3 million to his children. The exemption amount is $5 million. Thus, $2 million of Tom’s estate tax exemption remains unused. Tom’s widow, Jane, as executor of Tom’s estate, can file an estate tax return for Tom’s estate transferring the unused $2 million to herself. This additional $2 million exemption amount added to Jane’s $5 million exemption she already is entitled to use, will enable Jane’s estate to pass $7 million estate tax-free at her death if she dies in 2011 or 2012.

The Gift of Gifts

In 2011 and 2012, a person can give a maximum gift of $5 million during his or her lifetime or at death without paying gift or estate taxes. This presents opportunities for wealthier estates to consider aggressive gift planning strategies over the next two years.

The Gift of Planning

If your plans include taking advantage of the many gifts of the 2010 Act, a backup plan for years beyond 2012 may be prudent in the event this gift refuses to keep on giving in 2013 and beyond. Consult with an attorney and CPA for more information on how the new law affects you.

January 2011 — West Seminole News

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