The late 2010 enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (“2010 TRA”) extended the 2010 repeal for two years postponing the sunset so that on January 1, 2013 the estate tax will again return to pre - Bush levels. This means that in 2013 the highest estate taxable rate will again be 55% and the maximum amount of assets you can exempt from estate tax is $1,000,000. The 2010 TRA gave us two more years to extend those tax cuts and provide additional relief for millions of taxpayers.
What is the new estate tax law under the 2010 TRA :
The 2010 TRA reinstates the estate tax for 2010, although 2010 estate executors may opt out of the tax if they take certain steps; and
-For 2011 through 2012, we are granted a lower tax rate and a higher exemption than those previously scheduled for 2011 and beyond.
What happens after 2013 :
At present, the lifetime gifting exemption and the estate tax exemption is scheduled to again sunset back to $1,000,000 per person after December 31, 2012. Many planners are now taking steps to make use of the $5,000,000 exemption during this 2 year window in case it is not available after 2012.
How does the 5 million exemption work?
On a person's death, the first 5 million will pass estate tax free. This will include any lifetime gifts using the lifetime exemption amount. The one-time lifetime exemption has always been 1 million since 2002 but is now increased to 5 million for the years 2011 and 2012.
How much is the gifting annual exclusion?
The annual exclusion amount remains at $13,000 per year/ per donee. There also remains the unlimited gift-tax exemptions to charities, educational institutions, and health care providers and facilities.
How much can we gift to a Non-resident, Non-Citizen (NRNC):
The gift tax exemption to NRNCs remains unchanged. There is still only a $60,000 estate tax exemption for NRNCs. Qualified Domestic Trusts (QDOTS) are still unchanged meaning they are still subject to estate taxes as if the assets were included in the estate of the first dying spouse, with allowances for applicable credits of the first dying spouse (unless the surviving spouse becomes a US citizen before his or her death).
Rates and Exemptions:
Every person is now allowed a $5 million exemption that will shelter their lifetime gifts and death transfers from the estate, gift, and generation skipping tax. This means there will be no federal estate tax owed if the amount of gifts made during lifetime and at death are less than $5 million for 2011 and 2012.
The exemption that was scheduled to sunset for January 1, 2011 to $1 million would have taxed anything over $5 million at the highest taxable rate of 55%. Now, for 2 more years, we have an exemption amount equal to $5 million and the highest taxable rate is reduced to 35%. We also have a 2 year portability between spouses. Estates of 2010 also have the opt-out election of using the $5 million exemption and the 35% rate unless the estate executor elects to have certain carryover basis rules apply.
Portability of Exemption:
The new law also provides for the first time ever a portability factor which means that any unused portion of the first dying spouse's estate tax exclusion amount passes for use by the surviving spouse. The first dying spouse has to be a US resident or citizen. There is no minimum marriage period of time, nor does the marriage have to be the first marriage, but only one marriage portability can qualify. This portable exclusion amount is called the ‘DSUEA”, DECEASED SPOUSAL UNUSED EXCLUSION AMOUNT. As of now the DSUEA also sunsets after 2012.
Is it time to review your estate plan?
Importantly, you should review your estate plan especially if your plan has trusts that use formulas to determine the amounts that pass to a spouse and descendants. The new estate tax rules may cause results that would contradict your intent under those formulas. Under a standard formula allocating the maximum amount that can pass free of estate tax to a “bypass” trust for the benefit of descendants and then the balance of the estate to a marital trust for the surviving spouse, the entire estate may pass under the bypass trust if your estate is 5 million or less. If the surviving spouse is also not a beneficiary of the bypass trust, under the current estate tax, the bypass trust could effectively disinherit the surviving spouse.
There are some unique planning opportunities now available to people who want to take advantage of the 2 year window of opportunity to shelter gifts. Some married couples, with separate revocable trusts designed to fund the credit shelter trust on the first death, may consider a switch to joint trusts, for convenience, less confusion, and which may possibly enable them to obtain a step-up in basis for more than half of the trust assets on the first death (by use of powers of appointment) and to fund a credit shelter on the first death with all of the joint trust assets.
Whether you have a taxable estate or just haven't looked at your plan in years, its time to review your plan in light of these substantial changes to the estate tax law. Even if your plan was not implemented for estate tax reasons, it may still need changes.
Correctly Named Fiduciaries:
The hardest decision in planning your estate is who do you trust to be the fiduciary to act for you in the event you are disabled, or to carry out your intent on your death? Are your named fiduciaries still the right people to have as personal representative, trustee and guardian of the minor children?
Planning with Minor Children:
When you signed your estate plan were your children minors and now they are adults? Perhaps the minor children could now act as a fiduciary. If your children are now young adults, have they given you a power of attorney for health care, and do they need other planning? Even young adults need wealth planning to keep creditors, spouses and other potential problems at bay.
If you do have minor children, does your will name a guardian, and have you set up trusts for their inheritance? With a trust you can determine the ages and stages your children receive any wealth they would inherit.
Do you need to change your estate plan upon divorce?
If you've recently divorced, you need to change your estate plan. Otherwise, your ex-spouse could get back all of your assets as the guardian of the minor children should you die while your children are still minors. With a proper trust you can name the trustee of your choice to manage the assets for your minor children other than your ex-spouse.
Planning for Disability maybe the most important reason to have a trust .
We are living longer then ever so plan for it while you are still able. You may not always be able to manage your estate, pay your bills, and take care of yourself financially. Name the trustee you trust to manage your estate for you and in your best interests while you are living. Not all estate planning is for dying, much of it is for living. Take care of yourself first during your lifetime. Don't wait for the need to have a court-appointed conservator manage your estate. What if the court chooses someone you would never choose if you were to make that decision? A simple form would instruct the court if need be what your intentions are in this regard. Better yet, a revocable trust names a trustee and a properly funded “living” trust holds title today to your assets, avoiding the need for a power of attorney or conservator of your estate.
Trusts need to be funded. Last but not least, remember that having a properly funded trust avoids probate administration. If you have a living trust it can “speak” during your lifetime for disability planning, and then again on death, for administrative purposes, avoiding the need for a public probate proceeding and retaining your confidentiality. Trust planning is especially important for those of you with real estate in many states. Since real estate is governed by the state in which it is domiciled, those of you with multiple state homes would have to have a probate estate in each state that you own property. If you place those homes in your revocable trust you can avoid multiple probate administrations on death because your trustee can administer them all through one trust administration. Once you sign your wills and trusts you still have to transfer title of your assets into the name of your trustee, otherwise, your plan is only effective upon death and the trust loses its most important feature, that of being able to “speak” during lifetime.
The lawyers at Hoffman & Hoffman, P.A. are uniquely qualified to review your estate plan, discuss your planning needs, and implement the right documents to help you put a plan in place that effectuates what you want, not what others want for you. We have over 20 years of experience in drafting estate plans and administering probate estates. Contact our offices today to schedule that most important initial consultation. This is a process that should not be put on the back burner. It often requires multiple consultations and conversations with your loved ones prior to making the decisions necessary to begin the drafting. We are willing and able to help you take the first steps and guide you through to the end. We look forward to working with you from the beginning planning stages and throughout the years to help you keep your planning current.
For an initial consultation with one of our experienced attorneys call 305-372-2877 or 877-858-2977 or fill out the contact form on the right side of this page.
