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How Much Tax Will Your Estate Owe? |
Greetings!
 Hello! Now that 2011 is almost here, it's time to send an update and alert about the big changes coming to federal estate tax law in January 2011.
Our feature article is a summary of what the "sunset" of current tax law provides and what you need to know about how these changes (and future changes) will affect you and your family.
The end of the year is always a time when people think about a "check-up" for their legal and financial goals and plans. Over the next few months we'll send out information to our clients describing the new and improved Lifetime Protection Program.
The LPP is designed to make sure your life and estate plan is never out of date. That way you can be sure to pass on your best legacy to those you care about.
Also, this month we published a series on "special " planning situations that are actually very common these days. You can read them at our website
Pollex Estate Planning Blog
Cordially,
Dagmar |
In 2001 Congress restructured the estate tax laws and passed a "temporary" ten year plan with a new estate tax structure.
In this ten year plan, the exemption for each person increased each year or two over the decade - until next year when EGTRRA sunsets and the tax rate goes back to what it was before EGTRRA
These annual changes to the exemption remind me of that well-known adage from Ben Franklin - "nothing is certain but death and taxes". This has never been more true than now.
Here's a recap of estate tax law for the past ten years. In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) imposed gift, estate and generation skipping taxes depending on the size of the gift or the size of your estate at death. In 2009, the estate tax and generation skipping tax (GST) exemptions were both $3.5 million, the lifetime gift exemption was $1 million and the annual gift exclusion was $13,000.
On January 1, 2010, the estate and GST taxes were repealed. The gift tax rules remained unchanged except the gift tax rate dropped to 35%.
But beginning in January - less than 5 weeks away- this same law (EGTRAA) provides that next year we go back to the past. For 2011, the estate tax exemption will only be $1 million. That means that many more estates will be paying estate taxes with a top rate of 55% of amounts over $1 million.
In the past ten years, tax experts and commentators almost without exception assumed that Congress would pass a new tax law to replace EGTRAA when it expired and that it would do what was originally intended - come up with a replacement for the law that reverts back to the $1 million exemption.
Now commentators have reversed those predictions and most think it is very unlikely that a lame duck Congress will pass a new tax bill before 2011. It is also clear that if and when a new bill is passed, we can count on more changes after that. This means, more than ever, you will need to have your estate plans reviewed regularly.
For some couples who formerly were in no danger of paying federal estate tax, taking advantage of a basic plan that gives each spouse $1 million exempt for taxes ( and therefore doubles their exemptions for the family) is adequate protection. In other situations, there are a few advanced planning techniques that may be important to you, your estate and your family. One of the simpler advanced planning options is the Irrevocable Life Insurance Trust (ILIT), which keeps your life insurance proceeds out of your estate (effectively doubling the amount of insurance proceeds your family will actually receive).
Families with taxable estate often include a survivor's life insurance policy (owned by an irrevocable trust) in their estate plan to replace funds that will be needed to pay estate taxes.
Clients who own businesses or other non-liquid assets, such as investment real estate or business assets, are well-advised to consider buying life insurance to provide liquidity and avert the need to sell those assets at "fire-sale" prices in order to pay estate taxes which are due 9 months after death.
The ILIT is created for the purpose of owning and holding your life policies. Annual exclusion gifts are often made to the policy for the benefit of the trust beneficiaries and then used to pay the policy premiums.
These completed gifts allow the policy proceeds to be exempt from estate taxation at death. The proceeds can then be used in full to create liquidity in an estate, pay other estate expenses, or create wealth for loved ones.
We'll discuss some other options for reducing estate taxes and for dealing with estate tax uncertainty in the next issue. |
 Here's one interesting article in a recent issue of the New York Times on what Congress should consider.What Should Congress DO?Will Congress be able to pass a new estate tax plan when EGTRRA sunsets - or will all estates be taxed at 45% to 55% of amounts over $1 Million? |
