The Pentera Blog
Federal Estate Tax Modified
The gradual phaseout of the federal estate tax begun in 2001 was modified and extended by Congress late in 2010. The amount that is exempt from tax per person has increased from $3.5 million in 2009 to $5 million in 2011 and 2012, and the top tax rate has been reduced from 45% to 35%. In addition to increasing the exemption amount, the new law introduced a new portability provision that generally allows any unused exemption amount at the death of the first spouse to be available to the surviving spouse and added to his or her own $5 million exemption. This increase in the exemption amount and the portability of any unused exemption between spouses should eliminate the threat of the federal estate tax for all but a small number of the wealthiest Americans. These two changes now allow a married couple to transfer up to $10 million free of transfer tax and thus free most individuals from having to resort to sophisticated transfer-tax planning techniques designed to reduce the impact of the transfer tax: Thus, the emphasis has shifted to focusing their primary planning on the who, what, when, and how of asset distribution.
Does this mean that tax consequences will no longer be a consideration in estate planning? Not really, as there are state inheritance- and estate-tax issues to deal with, as well as income- and capital-gain tax consequences attached to the distribution of certain types of property.
Example: Mrs. M's estate currently is not subject to federal estate tax, and she plans to make a bequest to her niece and to a charitable organization for which she volunteers. Her niece is currently listed as the beneficiary of her $100,000 IRA. Mrs. M has appreciated stock worth $100,000 with a basis of $40,000 that she would like to give to the charitable organization. After discussing her situation with her financial and legal advisors, Mrs. M changes the beneficiary designation of her IRA to the charity and bequeaths the stock to her niece. Tax results: There will be no income tax due on the IRA distribution to charity (a potential tax savings of $35,000); and the basis of the stock received by the niece will be stepped up to the date of death value, which can eliminate capital-gain tax on the $60,000 appreciation (a further potential tax savings of $9,000).
Planning pointer: The dramatic increase in the transfer-tax exemption to $5 million makes it very important to check with your estate-planning counsel on its potential impact on the distribution provisions of your will or revocable living trust document to determine if any changes or modifications are warranted.
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