Congress takes a pass on major estate tax reform
Now that Congress has put off making major estate tax changes for another two years, is it okay to sit back and relax? Not really. No matter the size of your nest egg, there are plenty of reasons to keep estate planning near the top of your to-do list.
What are the current rules?
First a little background. Before legislation passed in December 2010, the estate tax exemption was scheduled to return in 2011 to $1 million, meaning that if your estate totaled more than $1 million, you could be subject to the tax. The Tax Relief Act of 2010, passed last December, set the estate tax exemption at $5 million through the end of 2012. The top tax rate on estates was also scheduled to revert to 55% in 2011, but the 2010 law set the maximum estate tax rate at 35% through 2012 as well.
The $5 million estate tax exemption is per person; thus a couple's exemption is $10 million. Also notable in the law is the new portability of the unused portion of an individual's exemption. Under prior law, couples frequently performed complex estate planning to take full advantage of both spouses' exemptions. Now the law allows a deceased spouse's estate to transfer any unused exemption amount to the surviving spouse without all the complex planning.
Should you make lifetime gifts?
The rules are not just for estates. Lifetime gifts made to your children and friends also factor into the $5 million exemption threshold and in effect can lower the overall estate exclusion amount. For example, if you give away $2 million during your lifetime, your estate might be subject to tax on the remaining balance over $3 million, rather than $5 million.
However, there is a gifting strategy that counters this. The IRS allows annual tax-free gifts of up to $13,000 per recipient ($26,000 on joint gifts made by married couples) without eroding your $5 million exclusion. If you believe that Congress will eventually lower the estate exemption again, maximizing your annual gift giving might be even more important during 2011 and 2012.
In case that isn't complicated enough, there is one more estate-related tax to consider — the generation skipping tax (GST). The GST can be assessed when someone gives or bequeaths to their grandchildren an amount in excess of their $5 million exclusion. Congress uses the GST to make sure that each generation is taxed when passing on their estate.
Do you need a plan?
So what should a taxpayer do to take advantage of the current rules? First, estimate the size of your estate and if you may be subject to taxes, consult us and your attorney for planning options. For example, you might consider taking advantage of the favorable gifting and generation skipping tax exemptions by making tax-free gifts to planned beneficiaries now. It's important to realize that not only will planning for these events minimize potential estate tax, but also you will be preserving assets for your family.
If your estate is under the tax threshold, don't assume that you can just ignore estate planning. If you have a plan in place, you should review and update it at least annually. First, your financial situation might have changed. Or there could be changes among your heirs or beneficiaries. Think of all the births, marriages, deaths, and divorces in your extended family during the last year.
If you don't have an estate plan, establish one as soon as possible. A plan is not just about reducing estate taxes. At a minimum you need the following:
- a will or trust to specify who will inherit your assets and to appoint a guardian for any minor children.
- a medical directive or "living will."
- health care and financial powers of attorney.
- updated beneficiary designations for insurance and pension assets.
Estate planning didn't take a back seat just because more favorable rules apply to 2011 and 2012. It will always be a vital part of your overall financial plan.
For help calculating the value of your estate, or to learn more about how estate taxes might affect you, please contact our office and your attorney.