The New Estate Tax Rules: Your Plan for 2011

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Congress approved a new Estate Tax law last Thursday, December 17 2010 after nearly a year of speculation about its future. The new rules provide for a $5 million dollar exemption with a top tax-rate of 35%. This is obviously a far cry from the $1 million dollar exemption and 55% maximum rate originally scheduled to go back into effect next year after an estate tax-free 2010.

The $5 million exemption and 35% top rate go into effect on January 1 and will be in effect for 2 years (through 2012). As such, we are likely to see another re-negotiation of the estate tax at that time, but in the meantime it’s important to understand what these changes mean for you and your family and how you can plan accordingly. Two important aspects of the new law that you should know about are the portability of the exemption and the unification of the estate, gift, and generation-skipping taxes.

Unlike previous estate tax rules, the new law provides full portability of the estate tax exemption. In other words, after the death of one spouse, the second spouse is able to use any remaining exemption when passing his or her estate onto heirs. For example, if the first spouse dies and passes on $3 million, the second spouse has a $7 million exemption available to use. This change greatly simplifies the estate planning process, as prior rules required extensive planning to accomplish full-portability.

Secondly, the new estate tax law unifies the estate, gift, and generation-skipping taxes. Now there is a single $5 million exemption for all three types of bequests. This means, for example, that an individual could make a $2 million taxable gift and still have $3 million available to shelter his or her estate from the estate tax. It is important to note, however, that there is no generation-skipping portability between spouses. In other words, if one spouse uses $1 million of the available exemption, the other spouse would have $9 million available as described above, but only $5 million of that could be used to protect against generation-skipping taxes.

There are other important considerations for those who passed away in 2010. In this situation, estates can choose to use either the 2010 rules (under which there were no estate taxes) or the 2011 rules. If an estate opts for the 2010 regime, it must calculate the capital gains on all assets in the estate and may end up paying more in taxes than it would under the 2011 rules. Good advice would be of great help in this situation, so I recommend that you speak with your estate attorney about which year’s rules would be most appropriate for your situation.

The late passage of the estate tax changes is sure to be a relief to many who were uncertain about how to best plan for their families. While the future of the estate tax is uncertain, the new law succeeds in simplifying the planning process for many and benefits those whose estates would have been taxed under the old rules. Though we are probably all somewhat distracted by the holidays and the coming New Year, I encourage you to take the opportunity to use these changes to revisit your own estate planning needs for the coming years. And as always, I recommend seeking the guidance of a qualified professional in helping you to understand any lingering questions about the new rules or planning your documents accordingly.

For more detailed information about the new tax law provisions, including a table of changes that could be relevant to you, see Part 1 and Part 2 of the Quick Guide to the Tax Relief Act. You can also find more information on the estate tax, social security taxes, and other tax issues in this Summary of The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Written by Bradford Pine
Bradford Pine Wealth Group – New York City Financial Advisors

The views and opinions expressed in an article or column are the author’s own and not necessarily those of Cantella & Co., Inc. It was prepared for informational purposes only. It is not an official confirmation of terms. It is based on information generally available to the public from sources believed to be reliable but there is no guarantee that the facts cited in the foregoing material are accurate or complete.

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