The Straight Scoop on the New Tax Law and Your Estate Plan

Tax laws are confusing on a good day…

What you can deduct…

What you have to claim…

And with all the recent changes to the laws, it’s almost impossible to know if you’re doing the right thing.

We’re hoping this will help.

Here’s the straight scoop on how the new tax law affects your estate plan:

A Quick and Dirty List of What Changed

On December 16, 2010, Congress passed a new tax law that changes how your estate should be planned:

The estate tax has been restored retroactively to Jan. 1, 2010.

You can pass $5 million through your own estate without having to worry in  2010.  That amount will be indexed for inflation after 2011.  Anything over the $5  million mark is taxed at a maximum of 35 percent.

If you die in 2011, your surviving spouse can add any of your unused exemption to theirs – a new concept of portability. In calculating the total exemption (up to $10 million) the amount that’s portable is not indexed for inflation, but your surviving spouse’s own exemption amount is.

The gift tax still applies but the amount you can give away in your lifetime has     been raised from $1 million to $5 million starting in 2011.  This amount will be indexed for inflation as well, and you and your spouse can combine your lifetime limits for a total of $10 million.  If you plan to give away more than $5 million, the  tax rate on the excess will remain at 35%.

Generation-skipping transfer tax has been reinstated starting in 2011.  This tax is   applied on top of the estate or gift tax to any assets you pass on to your   grandchildren or to a trust you establish for their benefit.  The $5 million   exemption applies to this tax as well.  Interesting note: There is no tax on the   excess this year but that will change next year and the excess will be taxed at     35%.  Also note that portability does not apply to the generation-skipping transfer  tax.

When considering income tax on inherited assets, remember that the cost basis  for the assets is adjusted to the fair-market value on the date the owner dies.      This will help limit the capital-gains tax that your heirs have to pay if they sell the  asset.

If assets are inherited in 2010, the executor of the estate has an interesting choice to make: Choose to have the estate subject to the new tax law or follow the system in effect in 2010 (i.e., no estate tax).  If you choose the old law in effect for 2010, the estate must use the original price paid for any asset to calculate the income tax the heirs will owe.  You receive an exemption of up to $1.3 million on the gains and a $3 million exemption on assets inherited from your spouse.

How You Are Affected?

This law impacts you in several ways. First, we need to first make sure that your property will be divided according to your desires, and not dictated by Congress or by state law. For more than 50 years it has been common to use a written mathematical formula to divide the assets of a married couple when the first spouse dies to maximize estate tax savings. Likewise formulas have been used to provide funds for charitable causes and to benefit family and friends. With such increased exemptions impacting “formula clauses” in wills and revocable trusts, it is probably in your best interest to review your estate plan to be certain the plan will work as you intend.

Frankly, most estate plans should be reviewed every few years to make sure that the plan is not only consistent with the state of current law, but to also make sure that it reflects the family’s needs and circumstances. The new tax law provides a perfect reason for you to sit down and review your goals and make sure the important pieces of your plan still fit.

What Should You Do?

Please call my office as soon as possible to schedule time to review your estate plan. I can then make some recommendations for you to consider and will discuss any changes that I  believe are necessary for this law. The tax landscape changes fairly frequently, and it has changed dramatically over the past decade. Your estate plan should be as flexible as possible to make sure that your wishes are fulfilled from 2011 and beyond.  As you may recall, I have previously advised you that you should revisit your plan periodically to make necessary adjustments, not only for the occasional law changes, but the often more common changed circumstances of you own life

If you are thinking about planning your estate and would like an expert opinion on how to deal with the most recent changes to the estate tax laws, call us to schedule your Family Wealth Planning Session today.  We can identify what needs to be done to ensure that you have the right plan in place to take full advantage of all the recent changes.  Our Family Wealth Planning Session is normally $750, but this month I’ve made space for the next two people who mention this article to have a complete planning session with me at no charge.  Call today and mention this article.