The Rebirth of the Estate Tax: What That Baby Looks Like

11:00 am Uncategorized

In case you missed it this past weekend, Wall Street Journal reporter Laura Sanders broke down the current proposed estate tax legislation in a Weekend Investor column.  And it’s all pretty much good news for estate planning attorneys and their clients as it currently stands.

According to the latest news out of Washington, Democratic opposition in the House seems to be melting away and insiders are saying the bill is likely to pass.

Here, from Sanders’ WSJ column, are the pertinent details on the Senate bill that is expected to pass either later today or tomorrow:

Effective date. The law would kick in on Jan. 1, 2011. This means that for a small number of U.S. taxpayers who are very wealthy and very sick, there will be a substantial difference between dying in 2010, when there is no estate tax, and 2011, when there is one. But such life-and-death dilemmas will affect far fewer than if the 2011 individual exemption remained at $1 million.

Duration. The Senate’s bill makes this regime effective only for 2011 and 2012. At that point the provisions “sunset,” and if Congress doesn’t act, the 2013 top rate would again be 55% and the exemption $1 million per individual. So that may mean more estate-tax drama two years from now.

Inflation indexing. The $5 million exemption would be indexed for inflation beginning in 2012, which suggests the drafters foresee an extension.

Election for 2010 estates. The bill gives 2010 estates the choice of whether to use 2010 or 2011 tax rules. One consequence of this year’s tax lapse is that some heirs—often those of the affluent rather than the very wealthy—fare worse under this year’s law.

That’s because of a change in capital-gains tax. Just for this year, the tax on heirs who sell assets of those who died in 2010 is based on the original acquisition cost of the assets, not on their value as of the date of the taxpayer’s death, as is usually the case.

Portability of exemption. Each partner of a married couple has always been allowed a full individual estate-tax exemption, but under earlier law married couples often lost the value of one exemption unless they got good legal advice. The loss occurred if the first-to-die spouse left everything to the other without the proper trusts in place.

The Senate bill has a “portable” exemption that allows for easier post-death planning. After the death of the first spouse, any unused portion of the spouse’s $5 million exemption may go to the surviving spouse’s future estate.

Gift and generation-skipping tax. The Senate bill would, for the first time, “unify” the estate, gift and generation-skipping taxes, with one $5 million per-individual exemption for all three. In recent years the exemptions for the three levies have been out of synch, complicating succession planning for family businesses and other matters.

Under the Senate bill, if a taxpayer made a $3 million taxable gift during life, his estate would then have $2 million with which to shelter other assets from tax. If another taxpayer left $4 million to a generation-skipping trust for grandchildren at death, then $1 million would be available.

Important nuances remain, however. For example, there is no portability of the generation-skipping exemption between spouses.

Here’s how this works: At Mary’s death, her estate uses $2 million of her $5 million exemption, and the other $3 million carries over to her surviving husband, John. He can shelter $8 million of assets from estate taxes, but only $5 million of that can be used to protect against generation-skipping taxes.

The Senate bill makes no changes to the annual gift-tax exclusion, which is currently $13,000. The law allows anyone to give as much as $13,000 of cash or assets a year to any other individual, free of tax. There is no limit on the number of gifts, as long as they are made to different people.

If you have questions about how the latest estate tax legislation will affect your estate plan, contact our California estate planning law firm.

Get started by contacting our Orange County asset protection estate planning law firm as soon as possible.

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