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Estate Tax Exemptions Survive Longer

Maybe you can’t take it with you, but under the Tax Relief Act of 2010, you can give it to your spouse. In this case, “it” isn’t your assets but rather the portion of your federal estate tax exemption that’s not needed to shield your property from estate tax. Under the old rules, any part of your exemption not used at your death would be lost. Now, though, the exemption is “portable,” and that creates estate planning opportunities—at least through 2012, after which this new tax break is scheduled to expire.
 
Under the old estate tax law, the size of the individual exemption grew from $1 million in 2001 to $3.5 million in 2009, and the top tax rate on assets exceeding the exempt amount fell gradually from 55% to 45%. The estate tax then disappeared entirely in 2010 but was scheduled to return in 2011 with the 2001 exemption and tax rate. The Tax Relief Act, passed at the 11thhour, instead brings a whole new set of rules.
 
Now, there’s a $5 million exemption (the highest ever) and a flat 35% estate tax rate. And now, assuming an election is made by an estate before a deadline, a surviving spouse can take any unused portion of the exemption from the estate of the first spouse to die. This enables a married couple to shelter up to $10 million of assets from estate tax, regardless of which spouse dies first.
 
Suppose John Smith owns assets currently valued at $3 million and his wife Mary owns $6 million. John dies in 2011, so his exemption shelters the entire amount. The excess $2 million of the exemption can be carried over to Mary’s estate. Let’s assume she dies in 2012, and that her assets have increased in value by then to $7 million (or $2 million above the $5 million individual exemption amount). With the benefit of John’s unused $2 million exemption, her estate also owes no estate tax. (The $5 million exemption will be indexed for inflation in 2012, so the total exemption for couples could exceed $10 million.)
 
If a surviving spouse outlives more than one spouse, the exemption that can be carried over is limited to the lesser of $5 million or the unused exemption of the latest spouse to die. So, for instance, if Mary remarries and her new husband leaves her $1 million of unused exemption, Mary’s exemption would be capped at $6 million.
 
The big sticking point, however, is that these favorable tax rules are guaranteed to remain in effect only through 2012. That means families with substantial assets will need to stay vigilant in creating and revising their estate plans.

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




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