In the attempt to progress towards a modern US tax system, the Biden administration has proposed a number of changes to the current tax code. According to a publication released by the U.S. Treasury early this year, they hope to push these changes through Congress which is necessary to gain approval for the amendments. It’s true that many Americans are divided on the best methods for stimulating the US economy, however, one fact remains undoubtable - careful estate and tax planning is crucial for the wealth and financial security of American families.
The Greenbook, a publication that provides information regarding the Administration’s revenue proposals, details the proposed changes which will ultimately impact estate planning in numerous ways. Many of the effective estate planning strategies that have been diligently defined by professionals in the industry for decades may be discarded. However, this could also enhance certain processes in estate planning by implementing other key strategies.
Notably, the reduction of estate and gift tax exemption amounts is absent from the list of proposals. While it’s possible that this could change in the future, we know that for now, these tax exemptions remain extremely high. It’s important to understand the law as it is written today so that you can make appropriate decisions with your assets and prepare for other coming changes.
As it stands today, the estate tax laws that were passed under the Trump administration will expire and reset to the prior laws starting in 2026. If there is no action made by Congress to change this, the reset will restore the estate and gift tax exemption amount to $5 million, as it was in 2016. However, the rate of inflation must also be included in this amount which brings the total to roughly $6.6 million by 2026.
With this information in mind, it’s crucial that you do all you can now to determine the expected return on your investments for the future. To do this, you should consider the average rates of return on your current investments, compounded annually. Many people have found that a healthy return of 7% annually could double one’s net worth in just 10 to 12 years. However, if estate tax exemption amounts are reduced by roughly 50% and continue to increase with the inflation rate, you risk having to pay significantly high estate tax rates.
It can be difficult to prepare for the uncertainties that may affect your tax and estate planning strategies. Without knowing what the future holds, how do you determine the best way to protect your assets? To make a more accurate decision, some of the other Greenbook proposals should also be considered, such as:
These changes haven’t been approved yet by Congress, but their consideration could help sway your strategic plans. The following strategies are still effective tools under current tax law, and implementing them now could provide significant tax savings.
A grantor retained annuity trust (GRAT) is an estate planning strategy that allows the grantor to contribute appreciating assets to chosen beneficiaries using little or none of your gift tax exemption. To do this, you would transfer some of your property or accounts to the GRAT in which you will still retain the right to receive an annuity. Following a specified period of time, the beneficiaries will receive the amount remaining in the trust.
Another estate planning strategy that may be beneficial for you is to gift seed capital, typically in the form of cash, to an intentionally defective grantor trust (IDGT). You will then sell appreciating or income-producing property to the IDGT in which they will make installment payments back to you over a period of time. If the account or property increases in value over the period of the sale, the accounts or property in the trust will appreciate outside your taxable estate and will therefore avoid estate taxes. Additionally, the trust does not have to pay income taxes on the income the trust retains since the taxes are already paid on the income generated and accumulated in the trust.
In a spousal lifetime access trust (SLAT), the grantor is to gift property to a trust created for the benefit of their spouse and possibly their beneficiaries. An independent trustee can make discretionary distributions to those beneficiaries, which can also benefit you indirectly. Contrary, an interested trustee should be limited to ascertainable standards when making distributions, such as health and education. With this estate planning strategy, you can take advantage of the high lifetime gift tax exemption amount by making gifts to your spouse. This trust avoids the use of the marital deduction which means the assets in the SLAT will not be included in either your or your spouse’s gross estate for estate tax purposes.
Finally, there are irrevocable life insurance trusts (ILITs). This trust allows leveraging life insurance to ease the burden placed on your estate if it becomes subject to estate tax at your death. This type of trust is established by transferring an existing life insurance policy into the ILIT in which you make annual gifts to the trust in order to pay the premiums on the policy. At your death, the trust receives the insurance death benefit and distributes it according to the trust’s terms. The death benefit and the premiums gifted to the trust are completed gifts, meaning your estate would not include any of the trust’s value.
We are holding a series of webinars over the coming weeks, from which you can obtain a great deal of useful information. Just choose the session that fits into your schedule. The webinars are being offered on a complimentary basis, so you have everything to gain and nothing to lose. This being stated, we do ask that you register in advance so that we can reserve your seat.
To sign up for an estate planning webinar, visit Anderson, Dorn & Rader here. Once you find a date that is right for you, click on the button that you see and follow the simple instructions to register. For more information regarding estate tax exemptions and planning, connect with our estate planning attorneys today.
SPEAK WITH AN ESTATE PLANNING ATTORNEY
In 2001, Congress passed a law that made big changes to the estate tax. It raised the amount that could pass without tax, increasing it in steps from $675,000 in 2001, to $3.5 million in 2009. Then, in 2010, the estate tax was repealed for one year only-2010. The same law also said that the estate tax would return in 2011, with estates over $1 million being taxed as high as 55%. However, on December 17, 2010, Congress revised the estate tax with yet another new law: the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“TRA 2010”). The new law set the amount that could pass without tax at $5 million per person for 2010-2012. However, the new law is temporary and will expire after 2012. In 2013, the amount that can be passed free from tax will go back down to $1 million per person. Thus, unless the law is changed again between now and then, someone dying in 2013 would only be able to pass $1 million without an estate tax. In addition, the new law reduces the top estate and gift tax rate to 35% in 2010-2012. However, a top rate of 55% returns in 2013 and thereafter.
Congress also introduced a new “portability” provision. This is where one spouse can add their deceased spouse’s estate tax exclusion to their own exclusion, to shelter more from taxes. This portability provision, also known as the “Deceased Spousal Unused Exclusion Amount” can be used to shelter the assets of the surviving spouse. While intriguing on the surface, under current law this portability tax benefit only happens if both spouses die in 2011 or 2012. If either spouse hangs on until 2013 or beyond, there is no portability option available. Therefore, unless both spouses plan on passing away during those two years, creating an estate plan is still essential. Contact our office to learn more about how the portability provision could affect your estate plan.
So, what’s the gist of the new law? Prior to TRA 2010 we were facing a return to the $1 million estate tax exclusion on January 1, 2011. Now, we are still facing a return to the $1 million estate tax exclusion; it’s just put off for two years now–to January 1, 2013. The bottom line is that TRA 2010 is temporary. In two years, it will disappear as though it had never existed.
While planning to minimize or avoid estate taxes is certainly an important reason to meet with an estate planning attorney, creating an estate plan is about much more than protecting your beneficiaries’ inheritance from estate taxes. Planning for your estate and your legacy can protect your beneficiaries and the assets you leave them from their creditors, a future divorce, and even their own misjudgment. Estate planning is also about providing protections during lifetime, such as avoiding a guardianship or conservatorship proceeding if you’re incapacitated and protecting your nest egg from the possibility of an extended stay in a nursing home.
When income is received from any source, you are naturally going to be concerned about taxation. This will enter the picture when it comes to estate planning, and there are some misconceptions out there. In this post, we will take a look at the subject and pass along three facts about taxation that you should understand when you enter the estate planning process.
If someone leaves you an inheritance through the terms of a last will, you would not be required to report it as taxable income. Insurance policy proceeds fit into this category as well. When it comes to trusts, if there are appreciable assets, the earnings would be subject to taxation. Distributions of the principal would not be taxed.
There is also a step up in basis that enters the picture if you inherit the assets that appreciated during the life of the person that passed away. This means that you not be responsible for capital gains taxes on the gains that took place during the life of the deceased individual. However, if you keep the assets, and they appreciate in the future, you would be responsible for capital gains.
Though you do not have to worry about income taxes for the most part, it is important to be aware of the existence of the federal estate tax. This levy carries a maximum rate of 40%, so it is a very big deal if you are exposed. That’s the bad news, but the good news is that most people do not have to pay the tax.
There is a federal estate tax credit or exclusion. This figure represents the amount that can be transferred before the estate tax would become applicable. At the time of this writing in 2019, the federal estate tax exclusion stands at $11.4 million. There are annual adjustments to account for inflation, so you may see a somewhat larger exclusion next year.
To sum it up, the portion of your estate that exceeds $11.4 million could potentially be subject to taxation. However, there is an unlimited marital deduction. If you are married in the eyes of the law, and your spouse is an American citizen, unlimited tax-free transfers are allowed.
Plus, on the subject spouses, the estate tax exclusion is portable. This means that a surviving spouse could use the exclusion that was allotted to his or her deceased spouse.
There are some states in the union have state-level estate taxes, and the exclusions in these states are typically lower than the federal estate tax exclusion. As a result, you could be exposed on the state level even if you are exempt from the federal estate tax. Our practice is in Nevada, and fortunately, we do not have a state-level estate tax to contend with here in the Silver State.
Though there is no estate tax in our state, it is possible that individual that a resident’s estate could be exposed to state-level estate taxes. If you own valuable property in a state that has its own estate tax, the death levy could be applicable on the transfer after your passing.
We are holding a series of Webinars over the coming weeks, and you can obtain a great deal of useful information if you attend the session that fits into your schedule. There Webinars are being offered on a complimentary basis, so you have everything to gain and nothing to lose. This being stated, we do ask that you register in advance so that we can reserve your seat.
There is a Webinars schedule page on this website that you can visit to get all the details. Once you find a date that is right for you, click on the button that you see and follow the simple instructions to register.
Many people that reside in our area have been very successful financially, and we have developed numerous relationships with high net worth families over the years. We continue to build on them, and it is gratifying to help successful people preserve their legacies for the benefit of their loved ones.
One of the most important things to take into consideration when you are engaged in the estate planning process is the potential for taxation. Though there are state-level estate taxes in some states, there is no such levy in Nevada. However, everyone in all 50 states must be concerned about the ravages of the federal estate tax.
This tax carries a 40% top rate, so we are talking about a significant level of asset erosion. It can be applied on transfers to anyone, even immediate family members, with one exception. If you are married to an American citizen, you can use the federal estate tax deduction to transfer any amount of property to your spouse in a tax-free manner.
At the time of this writing in 2019, the federal estate tax exclusion is $11.4 million. This is the amount that you can transfer to anyone other than your spouse before the estate tax would become applicable. Each year there are adjustments to account for inflation (for example, it was $11.18 million last year), so you will probably see a tick upward in 2020.
The first thought that would naturally cross your mind when you digest all the numbers above would be to give gifts to your loved ones while you are still living to avoid the estate tax.
Wealthy folks used to do this right after the estate tax was initially established in 1916. A gift tax was enacted eight years later to close this window, but it was repealed in 1926. The respite was short-lived, because the federal gift tax was reenacted in 1934, and it was unified with the estate tax in 1976.
As a result of this unification, the $11.4 million exclusion is a unified exclusion. It applies to significant gifts that you give while you are alive along with the estate that will be transferred after your death. This is the bad news, but the qualifier “significant” is the good news.
Relatively modest gifts that you give are not subject to taxation, because there is another gift tax exclusion that sits apart from the unified federal gift and estate tax exclusion. This is the annual per person exemption that allows you to give as much as $15,000 to any number of individuals within a calendar year free of transfer taxes.
This may not sound like much if you are exposed to the estate tax, but it can add up considerably when you see a bigger picture.
If you are married, you and your spouse would have a total of $30,000 to give to an unlimited number of recipients each year. Sustained gift giving over an extended period of time to people that would otherwise be inheriting the money can be an effective estate tax efficiency strategy.
Direct gift giving is a possibility, but this exclusion is often used to fund certain types of trusts, and it can be utilized to transfer assets among members of a family limited partnership.
There are two other types of gifts that can be given without incurring any transfer tax liability. One of them is the educational exemption. Under the tax code, you are allowed to pay school tuition for students without incurring any tax liability for your generosity.
This is a tuition only exemption that does not apply to books, fees, and living expenses. This being stated, you could use your annual $15,000 per person gift tax exclusion to provide extra support.
In addition to the educational exclusion, if you choose to pay medical bills for others, including health insurance premiums, there would be no transfer tax liability.
Our attorneys are holding a series of Webinars over the coming weeks, and we urge you to attend the session that fits into your schedule. There is no admission charge to pay, but we ask that you register in advance so we can reserve your seat. To check out the dates and obtain registration information, visit our Webinar schedule page.
Where you die matters. While you’ll pay the same federal estate tax no matter where you die, 1/3 of the states have a separate estate or inheritance tax. The most populous state, California, is the latest state to consider adding a state estate tax. Read on to learn more.
When and Where You Die Matters
We serve clients in the Reno-Tahoe area, and there are many very successful people here. It is a good feeling to reach your financial goals and go forward with the knowledge that you will be able to leave a legacy for your loved ones to draw from after you are gone. This being stated, there is a looming threat that can have a negative impact on your family.
There is a federal estate tax in the United States, and the maximum rate is a whopping 40 percent. Some states in the union impose state-level estate taxes, but fortunately, here in Nevada there is no state estate tax. However, if you own valuable property in a state that does have its own death tax, it could be a factor for you.
The majority of Americans do not have to worry about the federal estate tax, because there is an exclusion that is relatively high. This is the amount that you can transfer before the estate tax would be applied. In 2011, a $5 million exclusion was established, and this figure was retained with adjustments to account for inflation through 2017.
During that year, new tax legislation was enacted, and the estate tax was impacted significantly. The exclusion went up to $11.18 million for 2018, and this is the benchmark under this law. Now that the new year is upon us, we have a slightly higher figure, because an inflation adjustment has been added. The federal estate tax exclusion in 2019 is $11.4 million.
It is important to note the fact that this is a per person exclusion, so a married couple would have a total exclusion of $22.8 million using the figure that is in place this year. Plus, the estate tax exclusion is portable between spouses. This was not the case prior to 2011. In this context, the term “portability” refers to the ability of a surviving spouse to use the exclusion that was allotted to his or her deceased spouse.
2019 Gift Tax Exclusion
When you hear about the existence of the federal estate tax, you would logically consider lifetime gift giving as a way to get around it. This used to be possible shortly after the enactment of the tax in 2016, but the gift tax was put into place in 1924 to close the loophole. It was repealed in 1926, but it came back for good in 1932.
The gift tax the estate tax are unified under the tax code. This means that the $11.4 million exclusion that we have in 2019 is a unified exclusion that encompasses lifetime gifts along with the value of your estate. For this reason, large gift giving is not an effective estate tax efficiency strategy.
In addition to the unified gift and estate tax exclusion, there is a separate annual gift tax exclusion. This allows you to give a certain amount to any number of individuals every year free of the estate tax. It is sometimes adjusted to account for inflation as well, but there will be no changes in 2019. The annual gift tax exclusion is $15,000 per person, so a married couple would have a total annual exclusion of $30,000.
If you are exposed to the estate tax, the utilization of this annual exclusion could be useful to you. To provide an example, let’s say that you have five married children. You could give $30,000 to each husband and each wife every year. This would allow you to divest yourself of $300,000 annually tax-free.
If you are on this website, you must be looking for sound information about estate planning and elder law topics. You are definitely in the right place, because we have many resources here, and you are welcome to explore the site and take advantage of the written materials.
In addition to this, we go the extra mile to provide learning opportunities to members of our community. Our estate planning attorneys hold Webinars on an ongoing basis, and you can learn a lot if you attend one of these sessions. There is no charge at all, but we do ask that you register in advance so that we can save your seat. To get all the details, visit our estate planning Webinar page.
The federal estate tax carries a 40% maximum rate, and the exclusion amount is $5.25 million in 2013. What this means in simple English is that only $5.25 million worth of assets can be passed on to your heirs before the estate tax is imposed. Married couples, with proper planning, can preserve the exclusion amount for both spouses for a combined exclusion of $10.5 million.
We also have an unlimited marital deduction that allows you to leave any amount to your spouse free of the estate tax, even if it exceeds the exclusion amount. That is, as long as you and your spouse are both United States citizens.
It is not entirely uncommon, however, for Americans to marry people who are citizens of other countries. At any given time we have a lot of military personnel stationed overseas, and sometimes they marry people that they meet in other countries.
Many civilians work abroad as well, and there are international dating sites that some people find to be appealing. And of course world travelers sometimes fall in love along the way.
Whatever path you may have taken to an international marriage you must concern yourself with the estate tax because the marital deduction is not extended to an American who is married to a non-citizen.
A partial solution could be the creation of a qualified domestic trust. With these trusts the beneficiary, your surviving spouse, can receive distributions from the trust for their needs according to an ascertainable standard established by the IRS.
What remains in the trust at the spouse's death would be subject to the estate tax. However, applying other strategies, it could be possible to avoid the estate tax, altogether.
To learn more about these trusts and other tax efficiency tools contact our firm to set up a free consultation.
People that have assets that exceed the exclusion amount ($5.25 million in 2013) most certainly need to discuss tax efficiency strategies with a licensed estate planning attorney who places an emphasis on wealth preservation.
However, there are those who the only reason someone would meet with an estate planning lawyer is to avoid taxes. They may reason that because their estate is less than the exclusion amount, there is no need for estate planning. In fact, there are myriad concerns that can be addressed with a properly constructed estate plan that have nothing to do with tax exposure.
One of these concerns could be long-term access to financial resources. You may be concerned about leaving lump sum inheritances to certain people on your inheritance list. After all, you won't be around to help if someone in the family was to burn through his or her inheritance too quickly.
A way to respond to this would be to convey assets into a spendthrift trust. You appoint a trustee, and this could be a family member, the trust department of a bank, or a trust company. This trustee will administer the funds according to your stated wishes and distribute assets to the beneficiary in a measured fashion. The beneficiary will not be able to control the principal, which also means their creditors would not have access, either.
This is only one possible scenario. There are many others, including planning for blended families and providing for a family member with special needs without jeopardizing disability benefits.
Arranging for the transfer of your financial assets to your loved ones is a profound act. It is something that is best undertaken with the benefit of professional guidance.
The role of Life insurance is extremely important when considering your estate plan. We would like to highlight three commonly asked questions about the tax implications, and provide the answers to them here.
I have been made aware of the fact that I am the beneficiary of a life insurance policy, and I'm concerned about the tax implications. Will I be required to report the receipt of the proceeds when I file my income tax return?
This is a frequently asked question, and the answer is probably going to be a welcome one. In general proceeds received from a life insurance policy are not going to be looked at as taxable income by the Internal Revenue Service.
I own a number of insurance policies, and my estate is quite valuable. Will the value of the insurance policy proceeds count as part of my taxable estate for estate tax purposes?
Unfortunately the answer to this question is yes. At the present time the estate tax exclusion is $5.25 million, and the maximum rate is 40%. If the sum total of your assets is in excess of $5.25 million, including your life insurance policy proceeds, the estate tax may indeed be a factor.
Can anything be done to remove these policies from my taxable estate?
Yes, it would be possible to place the policies into an irrevocable life insurance trust. However, to satisfy IRS regulations you must live for at least three years after transferring the policies into the trust for the assets to be effectively removed from your estate. There are ways to avoid the three-year wait, but they must be addressed by a qualified estate planning lawyer.
The estate tax parameters we could expect for 2013 were hazy throughout last year. At the end of 2010 a piece of legislation called the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was passed that implemented the rules for 2011 and 2012.
Due to provisions contained within this act the estate tax exclusion was $5 million at its base with annual adjustments for inflation. The estate tax, the gift tax, the generation-skipping transfer tax was set at a flat rate of 35%.
This tax relief act was scheduled to sunset at the end of 2012. Under laws that existed throughout the year the maximum rate would automatically go up to 55% while the exclusion went down to $1 million upon the expiration of this measure. This tax increase was one of the perils that we would have faced had the country gone "over the cliff."
Because of the agreement that was reached around the first of the year we avoided the cliff and the estate tax parameters are largely unchanged. We still have a $5 million base exclusion adjusted for inflation. The Internal Revenue Service has announced that adjustment, making the estate tax exclusion $5.25 million in 2013.
The top rate of the federal estate tax has been raised, but the increase is not anywhere near as severe as it could have been. In 2013 the rate has gone up from 35% to 40%, and once again this applies to the gift tax and the generation-skipping transfer tax as well.
Though things could have been worse 40% of your taxable legacy is a lot of money. It is however possible to implement tax efficiency strategies that will preserve your wealth.
As Reno estate planning attorneys we have a thorough understanding of tax laws, and we urge you to contact us to arrange for a consultation if you would like to tap into some professional expertise.
We can be reached by phone at 775-823-WILL (9455), or online at www.wealth-counselors.com.
A couple of years ago a legislative measure was passed that has subsequently been named the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. This legislation re-unified gift/estate tax exclusions.
In 2011 the amount of the unified gift and estate tax exclusion was $5 million. This year the exclusion has risen to $5.12 million to account for inflation.
Throughout both 2011 and 2012 the maximum rate of the gift tax, the estate tax, and the generation-skipping transfer tax has been 35%.
As a result of the above, people who have resources that do not exceed $5.12 million have been more or less immune from taxes on such transfers to their loved ones.
However, things are changing in the very near future.
This tax relief act is going to expire at the end of 2012. If this expiration takes place without any new legislation being enacted the exclusion will go down to $1 million while the top rate rises to 55%.
Those who have resources in excess of $1 million may want to consider giving gifts during the 2012 calendar year. There is, of course, a very limited window of opportunity left because the end of the year is rapidly approaching.
The act of funding certain types of trusts such as dynasty trusts could be taxable under gift tax regulations. Aside from giving direct gifts, however, there are methods that could allow you to take advantage of this larger exclusion to fund an irrevocable trust for the benefit of loved ones. These methods may allow for discounting, so an even greater amount may qualify for the exclusion.
Giving shares in a family limited partnership or family limited liability company may also be a possibility.
These methods are relatively sophisticated, so if you are serious about wealth preservation you would do well to discuss this temporary opportunity with a qualified Reno estate planning lawyer as soon as possible.
It is logical to assume that passing along assets to your heirs after you die is not something that will cost you a lot of money. Why should it? Of course you have to retain the services of an estate planning attorney to get the correct documents in place, but after that it would seem as though no further costs should be incurred. Unfortunately however, there is indeed a formidable source of asset erosion out there that must be addressed in the form of the federal estate tax.
Who has to pay the estate tax? This is a very good question, and it is not an easy one to answer because the parameters of the estate tax are constantly changing. The dividing line that you need to keep an eye on is the estate tax exclusion. Right now the estate tax exclusion is $5 million, which means that only the portion of your estate that exceeds this amount is subject to the estate tax, which is presently carrying a 35% maximum rate. However, if the laws stay the same as they are right now, in 2013 the estate tax exclusion will be $1 million, and the top rate of the tax will be 55%. In 2008 the exclusion was $2 million; in 2009 it was $3.5 million; and during 2010 it was repealed, so you can see that it is difficult to plan ahead considering the way that the exemption is always changing.
Estate planning attorneys often emphasize the fact that your estate plan is going to have to be updated as your life changes. But in addition to the changes that take place in your own life you have to be ready to react to circumstances that are not under your control, such as alterations to the estate tax laws. The wise course of action is to stay in touch with your estate planning attorney who will keep you apprised of changes that may have an impact on your estate plan.
Last year, estate planning attorneys were placed in a difficult position because there was a lot of uncertainty regarding the future of the estate tax parameters. If the laws stayed unchanged as they were throughout most of the year, the estate tax exclusion would have been $1 million and the rate of the tax would have been 55% at the beginning of 2011. Due to provisions contained in the Bush-era tax cuts, the estate tax was repealed for 2010, but in 2009 the rate of the estate tax was 45% and the exclusion was $3.5 million.
Because of the new tax relief legislation that was signed into law by the president on December 17th, we now have a $5 million exclusion and a 35% maximum rate, but this act is set to expire at the end of 2012. As it stands right now, at the beginning of 2013 the rate of the tax will once again go back up to 55% and the exclusion will revert to the $1 million that was in place in 2002.
All this movement has a lot of people scratching their heads and this is one of the reasons why there is so much support for a permanent repeal of the estate tax. But the reality is that some people have already been victimized and treated differently than others over a period of just a few years. Let's look at a very simple example.
Let's say that you live on a block where everyone has a $5 million estate. If your across-the-street neighbor died in 2007 or 2008 when the estate tax exclusion was $2 million and the rate was 45%, his family would have had to pay the IRS $1.35 million. If your next-door neighbor died in 2009 when the exclusion was $3.5 million with that same amount of money, her heirs would have to pay $675,000. Now if your neighbor on the other side died this year, her $5 million estate wouldn't be taxed at all.
These are hundreds of thousands and even millions of dollars we're talking about that could make an enormous difference in the lives of your family members going forward into future generations. Even the most staunch pro-tax advocate would have to admit that there's something fundamentally wrong with the inconsistencies highlighted above.
As we all know politics has everything to do with spin. This is true not only during election cycles but it is also true once legislative processes have begun. We were led to believe that the changes to the estate tax that came out of the new tax act at the end of 2010 represent a positive example of true tax relief, and there is some truth in this. We now have an exemption from estate taxes of $5 million and a tax rate of 35%, which is the lowest rate in recent memory. The real question is whether there ought to be permanent repeal of the estate tax.
Why should the estate tax be repealed? There are a number of very compelling reasons and any one of them would be enough to provide logical support for a repeal.
The death tax is an instance of double, triple or more taxation. The tax brings is a very small portion of the revenue to the federal government and it is expensive to collect and enforce. It tends to break up family owned businesses and keep them from continuing because they have to be liquidated or take on substantial debt to pay the excessive tax.
Left in the hands of the family members who are anxious to see the business continue and grow, the economy will see added employment, and growth in the revenue to the government in the form of income taxes. Wealth that is inherited is invested, again allowing for growth and capital gains taxes.
There is some good news to report for those who agree that enough is enough when it comes to taxation. During the current legislative session no less than five bills (H.R. 86, H.R. 99, H.R.143, H.R. 177, and H.R. 123) have been introduced to the United States House of Representatives calling for a repeal of the estate tax. This is a positive development for anyone who is in favor of paying their fair share of taxes, but encouraging sustained growth at the same time.
One of the provisions that was included in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the max rate of the estate tax to 35%. It was scheduled to return from a one year repeal with a 55% top rate, so your first thought upon the news of the change would logically be one of relief.
But we need to put the matter into perspective. Since when is a 35% tax on after-tax earnings a cause for celebration? Compared to 55% this 35% seems almost tame, but in reality it is an extremely harsh bite and an instance of double taxation regardless of the rate.
In addition, the selective nature of the tax is patently unfair. The last time it was in effect in 2009 the exclusion was $3.5 million. Now it is $5 million, so it took a baby step in the right direction, but why should some people pay the tax while others don't? Why should a $10 million estate owe $1.75 million to the IRS while a $5 million estate owes nothing?
The polarizing pro-tax talking points involve making villains of Americans who would be subject to the tax, but it could be argued that anyone who buys into this is being misled. Let's say you created something like Facebook or invented a better mousetrap and you wound up with an estate worth a billion dollars. Under this "tax relief" act, $995 million of it would be taxed at 35% as you passed it along to your heirs after your death. So the federal government would take more than $348 million.
If you had the inspiration to create such a wealth building enterprise, would you feel as though the government deserved over a third of what was earned after you pass away? Some say they could afford to lose that much, if they could create that much wealth, but could the money lost to the government be more effectively used in further research and development that would create more wealth and provide jobs for more families?
Beyond that, consider the potential good that the $348 million could do as an inheritance. If it was in the hands of your children they would invest it to stimulate commerce and create jobs. If it goes to the government, it is swallowed up into a black hole of infinite debt and does little good for anyone.
The bottom line is that the matter of the estate tax has not been resolved, the debate goes on, and many Americans are still in favor of a total and permanent repeal of this draconian federal death levy.
There were some big changes to the estate tax parameters included as part of the new legislation signed into law by the president on December 17th that is being called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
The lead story from an estate planning perspective involved the rate of the tax and exclusion amount. Rather than the $1 million exclusion that was scheduled upon the expiration of the Bush tax cuts the exclusion is set at $5 million, and the rate of the tax is now 35% rather than the 55% that was on tap.
Is worthwhile to underscore the fact that this $5 million estate tax exclusion is for each individual. So if you are married you and your spouse have a total combined estate tax exclusion of $10 million to work with going forward in 2011 and 2012. If you think this through, a logical question will arise: If I passed away would my spouse get to use my $5 million exclusion as well as his or her own?
In estate planning circles this idea is defined as the issue of "portability." To many observers the estate tax in and of itself is unfair, so as you might expect most of the rules surrounding it tend to defy logic as well. Until the passage of this new tax relief legislation in December the answer to the above question was no, your surviving spouse could not use your estate tax exclusion if you were to pass away.
The reason why this is unfair is because the estate that is accumulated by a married couple is the product of the earnings and investments of each individual; this wealth represents the combined efforts of two people. When one of these two people passes away his or her contribution to the estate still exists and it is taxable, but his or her exclusion is not available to defray the tax liability.
As a result of the new law the estate tax exclusion is now portable, and your spouse can indeed use your $5 million exclusion if either of you were to pass away. Unfortunately, the new measure is only available for the next 22 months and dies with the sunset provision in 2013. Who knows what the law will look like at that time, but at least there is now a "toe in the door."
For those Americans who have been able to build some wealth throughout their lifetimes, estate planning has a lot to do with addressing the reality of the estate tax. Many people would suggest that there should be no estate tax at all. Their most convincing argument is that any assets that are left over after you have passed away represent a remainder that you managed to hang on to after paying any number of taxes throughout your life. And the more successful you have been, the more you have been taxed.
Love it or loathe it, however, we will likely always have an estate tax. For the past 10 years, one problem with the tax is uncertainty. If the estate tax was somewhat uniform and adjusted according to market conditions it could be planned for intelligently, but who must pay it and how much must be paid has been all over the place in recent years. In 2008 the exclusion amount was $2 million; in 2009 it was $3.5 million; in 2010 the estate tax was repealed; and in 2011 the estate tax exclusion was scheduled to be just $1 million. In addition to the reduced exclusion, the rate of the tax was scheduled to rise to as much as 55% in 2011 unless there was some 11th hour legislation to alter the law.
Lo and behold, that legislation has in fact been passed and the estate tax burden will be significantly lessened going forward. The bill that is going to extend the Bush era tax cuts and provide all Americans with continued tax savings also contains an estate tax provision. In light of the enactment of this legislation the estate tax exclusion will now be $5 million, and the top rate of taxation has been reduced to 35%.
Once again, however, these changes are only temporary and are scheduled to sunset in two years. What happens on January 1, 2013? You guessed it - back to a $1 million exemption and 55% tax. Uncertainty is still the order of the day.
These changes will impact many estate plans, so you may want to pay your estate planning attorney a visit to discuss how this legislation affects your existing strategy.
Due to provisions contained the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax was repealed for 2010. However, the estate tax is scheduled to return to its pre-2001 existence on January 1, 2011. For this reason it really has not had much impact on long term estate planning unless you were somehow certain that you were going to pass away in 2010.
The thing about the return of the estate tax in 2011 that is quite relevant is the fact that the exclusion amount will return to $1 million. It was $3.5 million when we last had to contend with the levy in 2009, so many estates that were previously protected are now going to be vulnerable to the estate tax. If you are in this position, or if the value of your estate has always exceeded the exclusion amount, a useful strategy that can be implemented to gain tax efficiency is that of gift giving.
The idea is that if you give gifts to your heirs while you are still alive you reduce the value of your estate to the point where it comes in under the $1 million exclusion amount. Of course, there is a gift tax to discourage this, but there are significant exemptions. The lifetime gift tax exclusion is $1 million, so you can give gifts at any time and in any increments throughout your life free of the gift tax as long as the value of these gifts does not exceed $1 million.
However, in addition to this lifetime exclusion, each taxpayer is entitled to give as much as $13,000 annually to an unlimited number of recipients, and these gifts don't count against your lifetime gift tax exclusion. You may also make unlimited educational and medical gifts, paying the tuition or medical expenses of as many people as you would like to equaling any sum of money free of the gift tax.
Contact our office today to schedule a complimentary consultation on how tax free gifts may reduce your estate's exposure to future estate taxes.
