Federal Estate Tax Reform 2011

As you may be aware, President Obama recently signed the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010”. In addition to keeping most of the income tax rates at their 2010 levels, this Act includes a major change to the federal estate tax.

Summary of the New Tax Law

Starting in 2011, each United States citizen and permanent resident alien will be entitled to a $5 million lifetime gift and estate tax exclusion amount. Anything over $5 million will be taxed at 35%. This means that starting January 1, 2011, you will be able to give away $5 million dollars either during your lifetime or at your death… but only for 2 years. This new tax law sunsets at the end of 2012.

Another major change in the federal estate tax law is that it allows for the transfer of a decedent’s estate tax exclusion amount to his or her surviving spouse. This is known as the portability provision. So let’s say a husband dies in 2011, leaving $3 million to his children; his widow can receive his $2 million in unused exclusion amount so that if she dies in 2012 she can pass on $7 million to her children free of the federal estate tax. This is a major boon to couples who fail to prepare a Will and for couples who have not equalized their estates.

So How Does the New Tax Law Affect You?

For 99.5% of the population, it means that you will not have to pay a federal estate tax if you pass away in 2011 or 2012, and you may or may not have to pay a huge estate tax if you die after that. Tax planning must be done to deal with state estate and inheritance taxes as well as the possibility that the federal estate tax will return in full force in 2013. Additionally, traditional estate planning documents should still be prepared to direct where assets go, set up trusts for children, nominate executors, guardians and trustees, where necessary, avoid probate.

It is also important to remember:

1. In Florida, the benefits of setting up a revocable living trust and avoiding probate remain unchanged. Additionally, if you own real estate in another jurisdiction other than Florida, you may have to pay an inheritance tax or estate tax in that jurisdiction.
2. New Jersey still has an estate tax that applies to anyone who dies with more than $675,000 in assets and New Jersey DOES NOT have a portability provision. Furthermore, New Jersey also has an inheritance tax, up to 16%, on transfers to certain individuals, including siblings, nieces and nephews and friends.
3. New York still has an estate tax that applies to anyone who dies with more than $1 million in assets. Moreover, New York DOES NOT have a portability provision and it is strongly recommended that clients title their assets in a way that will avoid probate.
4. Pennsylvania still has an inheritance tax of up to 15% that applies to everyone who plans to leave assets to anyone other than a spouse or a charity.

In most cases, the new law should not affect most of the documents that competent attorneys will have drafted over the last 5 years. However, I highly recommend estate planning documents should be reviewed if they were drafted by an attorney who does not focus on tax planning or if you have had changes in your personal life or a substantial change in your wealth.

The new tax law also provides ample opportunity for gift planning, including gifts to trusts; however, such gifting could also have negative capital gains tax implications if done incorrectly.

As always, I am available for a consultation if you have any questions.