Taxes

Today I read an excellent article warning CPAs (Certified Public Accountants) of the risks that many of their clients face with regard to estate planning. Even when some form of estate planning has been done, the following mistakes show up repeatedly in clients' estate plans:

(1) "Outdated or Unsigned Estate Planning Documents" (i.e., if they have a plan at all, most clients' plans are either outdated or inadequate, and worse yet, unexecuted)

(2) "Lack of Coordination between the Estate Planning Documents, Titling of Assets and Apportionment of Estate Taxes" (i.e. the house is still in dad's name rather than in the name of the trust resulting in an unnecessary probate proceeding)

(3) "Lack of Understanding That a Transfer of $1 Is a Gift" (i.e., that transfers (typically of real property) for less than the fair market value of the property constitute a gift)

(4) "Life Is a Movie, Not a Snapshot" (i.e., that estate planning should be viewed as a process rather than a one-time transaction)

 You've probably heard about the bill being hotly debated in Congress right now that would reinstate the federal estate tax (from it's current status of repeal) at a 35% rate on estates larger than $5 million ($10 million for married couples). Current reports are indicating that this bill will most likely pass. (Get more information about the bill here.)

What does this mean for you?

If the bill passes, and you and your spouse have an estate (real property, bank accounts, retirement accounts, life insurance, business interests, stocks, bonds, cars, boats, ATVs, etc.) that is less than $10 million, you will likely pay no estate tax if you die in 2011 and beyond (unless Congress decides to change things again). For married couples with estates larger than $10 million, you will be taxed at a 35% rate on everything over that number at the death of the second of you to die. This is good news for many of you.

If this bill does not pass, and you and your spouse have an estate larger than $1 million, you will be taxed at a 55% rate on everything over $1 million. Once you factor in the proceeds of life insurance and retirement accounts, most of you will probably find that your family will be facing a federal estate tax bill upon your death.

What is going to happen in the end? Your guess is as good as mine. If the bill passes, there are a number of my clients who will be very relieved as a result of the estate tax break that it represents.

As you may have heard, the federal estate tax rules changed radically in 2010 and could change radically again in 2011 unless Congress passes new legislation. This article is intended to advise you of what has happened and encourage you to reevaluate your estate plan as soon as possible.

2001 Tax Act. In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which provided for significant phased-in increases in the federal estate, gift and generation skipping tax (GST) exemptions and lower tax rates. EGTRRA provisions included:

• In 2009, the estate and GST exemptions increased to $3.5 million per decedent, with a flat 45% estate and GST tax rate on any excess. The gift tax exemption was $1.0 million, with tax rates from 41% to 45%.

• In 2010, the federal estate and GST taxes were repealed for one year. The gift tax $1.0 million exemption remained, with a lower flat tax rate of 35%. Thus, you had to die or pay gift tax to get the benefit of the change. The step up in basis rules (which gave a “fresh-start” fair market basis for most assets of a decedent) was replaced with an adjusted carry-over basis. These new basis rules permit a step up in basis of up to $1.3 million, plus an additional $3.0 million for certain spousal transfers at death.

• On January 1, 2011, EGTRRA will be automatically repealed, resulting in an odd situation:

The IRS recently announced that the annual gift tax exclusion amount will increase from $12,000 to $13,000 beginning Jan. 1, 2009.  This means that every individual can give away up to $13,000 per person, per year without having to file a gift tax return. For example, you could make a gift of $13,000 to each of your three children and to each of their spouses for a total of $78,000 per year (or two times that amount for married couples).  There is no limit to how many individuals you may make gifts to.