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Will New Estate Tax Rules Lull You Into Inaction?

At long last, Congress passed meaningful federal estate tax relief at the end of last year. Among myriad other tax law provisions in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, there’s a generous $5 million estate tax exemption, and the top estate tax rate has been cut to 35%—the same as the top rate for ordinary income. The law also coordinates other estate tax breaks for wealthy families.


But there’s a downside to these favorable estate law alterations—they’re scheduled to expire after 2012. So there’s a mere two-year window of opportunity before the next crucial crossroads for estate planning, and because it’s impossible to know what will happen next—or to guess what estate rules will be in effect at your death—the positive aspects of the new law could end up having a negative impact. Families whose wealth falls below the higher exemption amount may be lulled into doing nothing, but that’s a risky approach.

It took Congress almost a decade to revisit the subject of estate taxes, and it only happened now because
not acting would have had a dramatic result. In 2001, the estate tax was repealed—but only in a very gradual way, and only temporarily. During the years that followed, the exemption level rose gradually to $3.5 million and the top estate tax rate inched down to 45%. Then, in 2010, the tax was truly gone, but only for a year. Without the 2010 law, passed as the clock wound down on a lame-duck session of Congress, 2011 would have reinstated an exemption of just $1 million and a top tax rate of 55%. Finally, as part of an 11thhour tax compromise brokered by the Obama administration between congressional Republicans and Democrats, the new two-year estate law came into being.

Though the $5 million estate tax exemption and the 35% tax rate have gotten most of the attention, the new law also includes other significant changes. The individual exemption is now “portable” between spouses, so that a surviving spouse can utilize any unused portion of a deceased spouse’s exemption. That effectively lets married couples exclude $10 million from estate tax liability—but only if both die before 2013. The new law also again gives heirs a “step-up” in the cost basis of inherited assets—an advantage they didn’t have in 2010—and reunifies the rules for estate and gift taxes so that they share the $5 million exemption. That amount in total can now be transferred from your estate either before or after your death without incurring either kind of tax.

With these changes in effect, estate planning may seem easier than it was before, particularly if you have less than $5 million—or less than $10 million, between you and your spouse—to transfer to your heirs. Doing nothing at all now may seem like a reasonable option. But the biggest problem, again, is that the new rules are guaranteed to hold sway only through the end of 2012. If Congress then reduces the exempt amount—and, in the meantime, your wealth has grown—you might have to scramble to get a new estate plan in place.

What can you do in the meantime? One effective strategy is to continue to take advantage of rules for yearly giving that can reduce the size of your estate. Under the annual gift tax exclusion, you can give anyone assets valued at up to $13,000—$26,000 if your spouse joins in the gift—and you can make such transfers to as many people as you like each year. You can also avoid the issue of future estate tax rates by using your current $5 million credit to transfer additional wealth while you’re alive.

You can also pay attention now to estate issues that have nothing to do with taxes. It’s important to decide how to divide assets among your children, for example, and how to protect your wealth from creditors. Making provisions for the care of a disabled child, perhaps by establishing a special needs trust, could also be crucial. Indeed, trusts of various kinds might help you support your family and philanthropic organizations long into the future, regardless of what happens next to the political football of the estate tax laws.

For now, the latest big changes make this a good time to take stock of your estate plan, making any adjustments that may be needed in terms of how it is structured and in the language of your will and other documents. We can work with you and your attorney to make sure you’re taking advantage of today’s opportunities.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.



INDEX
  • Five Retirement Questions To Answer
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  • 6 Ways To Close The Retirement Gap
  • IRS Closes Valuation Loopholes
  • Passing Down IRA Assets? Clue In Family Members
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  • Watch Out For These 7 Retirement Ups And Downs
  • Why Would Anyone Take Their RMDs Sooner?
  • 10 Frequent Retirement Mistakes You Should Avoid
  • Tax Rewards For Year-End Generosity
  • Meeting With The Family For Elder Care Planning
  • 20 Questions On Required Minimum Distributions
  • Tie The Knot For Retirement With A Spousal IRA
  • Four Retirement Planning Rules Of Thumb To Bend
  • When Will New College Grads Be Able To Retire?
  • Last Chance To File-And-Suspend Retiree Benefits
  • You Know You're Getting Old When You Get RMD Notice
  • 10 Steps To Take On The Path To Early Retirement
  • How To REALLY Get Ready For Your Retirement Years
  • Can You Skip Over The Special Tax For Generation-Skipping?
  • What Do You Think Your Life Will Be Like In Retirement?
  • Raiding A Roth Early? No Woes
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  • Figuring Out How Much You Need In Retirement
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  • Roundup Of New Estate Tax Changes
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  • The Benefits Of Working With An Advisor
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  • Identity Theft : Correct Those Credit Reporting Errors
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  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
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  • Identity Theft: Everyday Prevention
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  • Identity Theft : Tips to Protect Yourself
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  • Identity Theft: Which Documents Should You Shred or Store?
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  • What Do Rising Interest Rates Mean For Money Market Yields?
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  • Year-End Tax Planning Can Help Generate High Return On Investment
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  • Income Tax Effect On Single And Married Taxpayers
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  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • Under New Law Taking Social Security at 65 Makes Sense for Most
  • When Do You Need Life Insurance
  • Year-End Tax Defferal Planning



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