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The new Estate Tax law explained

1-28-2011 - The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act was passed in the waning hours of the 2010 lame duck Congress and became effective January 1, 2011. Here's a summary of what the new law may mean for you. 

Keep in mind that any or all of these provisions could disappear or change beginning January 1, 2013, when the law will expire.

(1) Effective Jan. 1, 2011 through Dec. 31, 2012, the top federal estate tax rate is  35% on estates over $5 million. (There was no federal estate tax in 2010.)

(2) Families of those who die in 2010 have a choice: Elect to use the new law, or go by the pre-2010 tax code. The new law allows for a full step-up in basis, thus alleviating capital gains on inherited assets. Families more concerned with estate taxes than capital gains taxes will probably still opt for the pre-2010 regimen.

(3) The new law has a "portability" provision. This allows the estate of the second-to-die spouse to utilize whatever  portion of the $5 million exclusion was not applied to the estate of the first-to-die spouse. Note that the portability provision DOES NOT apply to those who passed away in 2010. 

(4) If you have a taxable estate, the new law presents significant opportunities to reduce the size of your estate through gifting. You may still make gifts up to $13,000 annually to as many people as you wish, and in any amount directly to medical providers and educational institutions. But now, you may also gift up to $5 million, gift tax-free, over the course of your lifetime.  

(5) Keep in mind that the new law does not apply to the individual states. Florida does not have its own estate tax, but some states, for example New York and New Jersey, do. If you are a resident of these or other states with an estate tax, you will need to incorporate tax planning into your plan.

(6) If you are a married couple who established a Credit Shelter Trust (Bypass Trust) for tax purposes and your estate is no longer taxable, consider creating a Spousal Option Trust. Unlike the Credit Shelter Trust, a Spousal Option Trust allows but does not require the surviving spouse to split the trust assets into two pots. If upon the first death there are no tax benefits, the survivor may forego this step, thereby avoiding unnecessary paperwork and administrative burdens. Read more about the Spousal Option Trust.

(7) If you do not have a taxable estate, you still need an estate plan that:

  • Authorizes someone to make your medical decisions and financial decisions if you become ill or incapacitated.
  • Allows your assets to pass without disruption to your loved ones. Even if your estate is not taxable, it will still need to be probated unless you have made alternative plans.

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