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It's The Law: Estate Tax Change is Huge

Question:I heard there is a new federal law that changes estate tax laws. Is that true and, if so, should I see my attorney about my will?

Answer:Big changes were made to estate tax law when the 2010 Tax Relief Act was passed by Congress and approved by President Obama. The new law has a substantial impact on estate taxes and estate planning.

There was originally no estate tax in 2010. Now there is. There is a retroactive estate tax on estates over $5,000,000.00 per person, which will be taxed at a 35% rate. Since the law is retroactive, it also allows estates of people passing in 2010 to choose between the new tax or no tax.

However, if no tax is elected, property is inherited at the decedent’s basis. That means, the person inheriting it gets it as if he bought it for what the decedent paid for it (or what it was valued on the “books” after depreciation).

In 2011 and 2012, and if tax is elected for 2010, property is inherited at its value on date of death (or alternatively 6 months later). That can be a lot more than the decedent paid, and it reduces tax on “profit” when the beneficiary later sells the property or asset.

The new estate tax will apply to estates of those dying in 2011 or 2012 (in excess of $5,000,000.00) with a rate of 35%. In addition, the tax will have portability for married couples. Portability did not exist under former law. It means any unused portion of the estate tax exemption in the estate of the first spouse to die can be used as an added exemption for the estate of the second spouse to die. This is not automatic. There are certain procedures that must be followed when the first spouse dies for this to work. The good news is that with proper planning, you can now shelter a combined estate of $10,000,000.00 from the Federal estate tax.

The gift tax exemption is increased from $1,000,000.00 to $5,000,000.00. This can allow planning opportunities to create legacy trusts that will last for generations in addition to what can be left free of estate tax in one’s estate. Combining the gift tax exemption with the estate tax exemption means a married couple can give assets worth $20,000,000.00 free of both gift and estate tax.

People with children who have done well financially, may want to make direct gifts to grandchildren or great-grandchildren. Why would you do that? It would save taxes by not being taxed as part of the estate of the child of the decedent. Congress did not like that, so it capped the amount of these generation skipping gifts that escape gift or estate tax at $1,000,000.00. Bequests and gifts in excess of $1,000,000.00 were taxed in the decedent’s estate, then at the maximum estate tax rate as if the decedent’s child dies with the asset in the child’s estate. What was left got to the grandchild. The new law increases the generation skipping exemption to $5,000,000.00. Even more good news, the bigger tax exemption is also portable.

The new tax law only lasts for 2 years. It is unknown what will happen after that time.

Because these changes are significant, you should discuss them with your estate planning attorney as soon as possible. They may open the door to an estate plan that is both a better match for your goals and results in more assets to your beneficiaries.

By: William G. Morris, Esquire

William G. Morris is an attorney with offices at 247 North Collier Boulevard on Marco Island, Florida. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.

Categories: Estate Planning