FINANCIAL LIFE | FALL 2011 EFFECTEstate Tax Rules Improved and Extended (Temporarily)
by Nick Houle
Late last year, President Obama signed tax legislation that extended the Bush era income tax cuts. The law also included significant and unexpected changes to the federal estate tax, gift tax, and generation skipping tax (GST). Only a week before this law was signed, both the Senate and the President’s proposals included tax rates and exemptions that had been significantly less—so this was welcome news. But with the financial world’s focus stuck on the debt ceiling debate for much of this year, it is easy to lose sight of some of the attractive (and temporary) opportunities this law provides.
The law includes the following:
- The federal estate tax, gift tax, and GST tax rates are reduced from 55 percent to 35 percent.
- The estate tax, gift tax for 2011 and 2012, and GST tax exemption is increased from $1 million to $5 million.
- The reunification of the gift and estate tax exemptions means that in 2011 or 2012, an individual can give away $5 million during lifetime or at death.
- After 2011, estate, gift, and GST exemptions will be indexed for inflation, which means in future years the exemptions will increase automatically, and inflationary changes in asset values will not cause an increase in the transfer tax.
- New portability provisions allow a married couple a combined estate exemption of $10 million.
- For those who died in 2010, the estate can either use the $5 million exemption with asset cost increase to fair value at date of death, or elect to have no federal estate tax apply (with a modified cost adjustment).
It is important to note these changes are temporary. The act is effective for tax years 2010 through 2012. Those in charge of the estates of people who died in 2010 have nine months from the December 17, 2010, enactment date to make decisions on how to best utilize the different rules, so time is running out.
Some might think that with a combined estate tax exemption for a married couple at $10 million, there isn’t such an urgent need for planning. However, many states, such as Minnesota, still have an estate tax, so it is necessary to review the rules of your state of residence. Other estate planning issues, such as asset protection through trusts, asset distribution planning, and charitable gift planning will need to be incorporated into a coherent plan that considers these recent changes.
With some reflection, these new provisions may provide taxpayers some excellent options. For instance, the increased gift tax exemption allows those who have life insurance trusts to make larger gifts to those trusts to fund future premiums. So don’t pass up these opportunities just because they are temporary.
If Congress had failed to act, the federal gift tax, estate tax, and GST in existence before the 2001 tax law would have returned in 2011 with a $1 million exemption for gift and estate purposes, a 55 percent marginal tax rate, and a $1.36 million GST exemption. So remember, as you review your estate plan and these new rules, this change is temporary. Even now, you need to be planning to adapt to a fluid tax environment in the near future.
One should not rely on this information for the primary basis of investment, tax or financial planning. General market information does not take into account such factors as an individual’s goals, objectives, risk tolerance, tax situation, age, or time frame. We believe the information obtained from third-party sources to be reliable, but neither LarsonAllen Financial, LLC nor its affiliates guarantee its accuracy, timeliness, or completeness. The views, opinions, and estimates herein are subject to change without notice at any time in reaction to shifting market conditions. Tax laws change and investments in the stock market entail risk and potential loss of principal. This material may not be republished in any format without prior consent.