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As of
January 1, 2010, the Federal estate tax has been repealed... but only for a
period of 12 months.
Exemption Amount Changed
As part of the 2001 tax act,
Congress increased the amount persons were permitted to give away tax-free at
death (the "Exemption Amount"), with the increases phased in over a
ten year period. The Exemption Amount increased over the years, reaching
$3,500,000 in 2009 and ultimately became unlimited this year. However,
because the votes of 60 Senators could not be obtained back in 2001, the tax
law changes were limited to a duration of 10 years, meaning that in 2011, the
estate tax will be reinstated with an Exemption Amount of only $1,000,000 and
a rate of tax equal to 55%, the exemption and rate of tax that were in effect
before the 2001 tax act was passed. Certain larger estates will be subject to
an extra 5% surtax that was repealed altogether in 2001, but which will also
be reinstated in 2011.
Other Changes
There are other changes that have
taken place for the 2010 tax year.
First,
under the now-repealed estate tax laws, property passing from a decedent used
to receive a step-up in cost basis equal to the property’s fair market value
as of the decedent’s date of death. That tax benefit has been eliminated for
persons who die in 2010, and instead, the basis of property acquired from a
decedent will be the lesser of the decedent’s adjusted basis or the
property’s fair market value on the decedent’s date of death.
Under
this rule, it is possible that the cost basis of property will be stepped
down. These new carryover basis rules will not only cause the imposition of
capital gains taxes that previously were avoided following a person’s death,
but the beneficiaries who inherit an estate now need to know what the
decedent’s cost basis was in the properties they receive. For many people who
inherit property in 2010, records will not exist or will be incomplete, thus
making it difficult or impossible for them to determine a particular
property’s cost basis. There are two important exceptions, though, to the carryover
basis rules. A decedent’s executor or personal representative is allowed to
allocate up to $1,300,000 to various assets owned by a decedent, thereby
increasing the cost basis of those assets.
Also,
an additional $3,000,000 of basis increase can be allocated to properties
passing to a spouse or to a special "qualified terminable interest
property" trust for the spouse (often called a "QTIP" trust or
a "marital" trust). Under the tax laws in 2010, just like the laws
which existed prior to estate tax repeal, any person may give an unlimited
amount of property to his or her spouse or to a QTIP trust (the "Marital
Deduction") without generating any gift or estate taxes.
Second,
the Federal gift tax, while not repealed, now has a lower 35% rate of tax, down
from the 45% rate in 2009. Under current law, each person may give away
during lifetime as much as $1 million in cash or other property without
generating any gift taxes. Any gifts which exceed this amount will be taxed
at 35%. The annual exclusion remains at $13,000.
Third,
the Federal generation skipping transfer tax has been repealed as well for
the 2010 tax year. Under the old law which existed prior to repeal, each
person could give away during lifetime or at death up to $3.5 million (the
"GST exemption") without imposition of the generation skipping
transfer tax. Any gifts to grandchildren or great-grandchildren (and to
certain other persons two or more generations younger than the person making
the gift) in excess of the GST exemption would have been subject to the GST
tax which was equal to the highest marginal estate tax bracket (45% in 2009).
Although the GST tax has been eliminated for 2010, it will be reinstated in
2011, and the available GST exemption will be reduced to its former level of only
$1,000,000 (although this amount will be indexed for inflation) and with a
55% rate of tax.
It
is unknown what will happen to the estate, gift and generation skipping tax
laws in 2010. It is possible that Congress will reinstate these taxes and
make them retroactive back to January 1, 2010. (It is not clear, though, if
retroactive reinstatement of the estate, gift and generation skipping tax
laws is constitutional, and this is an issue that may one day be decided by
the United States Supreme Court.) It is also possible that Congress will do
nothing in 2010, and let the laws revert to how they were prior to the 2001
tax act. It is possible as well that Congress will pass new legislation
creating new exemptions and rates of tax.
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Planning
in uncertain times and minimizing the impact of estate taxes on your plan
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Uncertainty,
changes and planning
The
uncertainty about estate taxes makes estate planning more difficult, but no
less important. If you have questions about your existing plan and how it
would be impacted, or if you are finally ready to dive in and get your plan
started, please give me a call to set up a meeting.
There
are ways to deal with estate taxes that preserve your estate and allow you to
pass it on to loved ones rather than have it consumed by the estate tax rules, however they might finally be written. I would be
happy to discuss them with you to see what plan is right for you.
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Estate
Plan Packages and discounts available
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My
fee structure
I
offer two estate document packages that are true bargains. Both include a Will, Revocable trust,
Health Care Directive, Power of Attorney, Certificate of Trust, and corollary
documents. Over the years these are
the documents that serve the needs of most people.
1.
For couples the fee for all these
documents for both of you is only $1,095.00.
2.
For an individual the fee is only $795.00
3.
If you get started and pay your fee prior
to January 31, 2010, you will get a 10% discount.
You
can get started either by calling me to arrange an initial free consultation
or go online to http://www.estateprobatelawyer.com/estate%20packages.htm and
follow the directions there.
I
look forward to working with you.
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