The headline catcher is that the Federal Estate Tax is $5 million, but there are other exemptions that are notable. The lifetime gift tax exemption is now $5 million. The annual gift tax exclusion amount remains at $13,000 for 2011 and is indexed to inflation.
Just to explain, there are two gift taxes. The annual gift tax exclusion is the $13,000, which is the amount you can give, per year, per person. So, if husband and wife both want to give the same person a $13,000 gift, they may and that would total $26,000 per year. If the gift exceeds the $13,000 limit, every dollar over $13,000 is taxed and must be reported on a gift tax return (form 709).
The other gift tax is a lifetime exemption and is currently $5 million. So, that means you are allowed to give away $5 million over your lifetime. This is total, not per beneficiary. If you give $1 million to one of your kids, when you die you only have $4 million of exemption remaining. If you gift more than $5 million during your lifetime, every additional dollar will be taxed at 35%.
Additionally, although the Federal Estate Tax exemption amount is $5 million, the Illinois legislature passed, and Governor Quinn enacted a state estate tax exemption amount of $2 million. So, although you can die with $5 million in assets and not owe any Federal Estate Tax, you will have to pay the Illinois Estate Tax on $3 million, which is taxed at
Saturday, March 5, 2011
Estate Tax Update - Part 3/ Asset Protection
Asset Protection is really risk management to discourage potential creditors from collecting from those protected assets. Asset Protection is not an exact science and the strategies used to protect assets are more like multiple layers of protection. There are several analogies that come to mind, the layers of an onion is one and a bit longer one is thinking of protected assets as placing a treasure in a metal box and placing a lock on the box. Now you put the box in a concrete room, with a steel door and a strong lock. This room could be located in a castle with a thick, high stone wall surrounding it. Around the wall is a moat and in the moat are crocodiles and, well I think you get the idea. Unless the creditor is very determined and able, they will rather go after easier treasure and leave the protected treasure alone.
The reason I bring the subject of asset protection up in this discussion of the new estate tax law is that some people will tell you that now that there is a $5 million estate tax exemption and portability of that exemption, that 99% of the public will no longer need to utilize trusts. I find two problems with this thinking.
First, is the fact that this legislation is temporary. The new tax laws have been passed for the next two years only and something will need to be done before December 31, 2012 or the law will sunset back to 2001 levels ($1 million estate tax) . There is a chance that the law will be ratified and continue on for the foreseeable future, however, there is just as great a chance that, the limits will be lowered even to the $1 million level.
Second, is the fact that there are other reasons aside from estate tax avoidance to utilize a credit shelter/family trust. Some of these reasons are:
1. Protect assets from lawsuit against the surviving spouse.
2. Protect the surviving spouse should he/she remarry and the new spouse needs to enter a nursing home.
3. Prevent the surviving spouse from unintentionally disinheriting children of the decedent.
4. Protect the growth in value of the deceased spouse's property during the life of the surviving spouse from future estate tax.
5. Allow flexibility for the surviving spouse to manipulate his/her income taxes after the first spouse's death.
6. If the law sunsets in 2012, we go back to 2001 rules.
The reason I bring the subject of asset protection up in this discussion of the new estate tax law is that some people will tell you that now that there is a $5 million estate tax exemption and portability of that exemption, that 99% of the public will no longer need to utilize trusts. I find two problems with this thinking.
First, is the fact that this legislation is temporary. The new tax laws have been passed for the next two years only and something will need to be done before December 31, 2012 or the law will sunset back to 2001 levels ($1 million estate tax) . There is a chance that the law will be ratified and continue on for the foreseeable future, however, there is just as great a chance that, the limits will be lowered even to the $1 million level.
Second, is the fact that there are other reasons aside from estate tax avoidance to utilize a credit shelter/family trust. Some of these reasons are:
1. Protect assets from lawsuit against the surviving spouse.
2. Protect the surviving spouse should he/she remarry and the new spouse needs to enter a nursing home.
3. Prevent the surviving spouse from unintentionally disinheriting children of the decedent.
4. Protect the growth in value of the deceased spouse's property during the life of the surviving spouse from future estate tax.
5. Allow flexibility for the surviving spouse to manipulate his/her income taxes after the first spouse's death.
6. If the law sunsets in 2012, we go back to 2001 rules.
Estate Tax Planning Update - Part 2/ Exemption and Portability
The new tax law signed by President Obama allows a person to pass $5 million at his/her death without any estate tax. This means a married couple can pass $10 million. Additionally, one can pass the first $5 million directly to the surviving spouse. This is referred to as portability. Previously, a married couple had to utilize a credit shelter trust or family trust to shelter the exemption amount from estate tax. This trust also protects assets from creditors, predators and remarriage issues.
Under the new law, even when the exemption amount ($5 million) is passed directly to the spouse, they still get to use the $5 million exemption from the first death. As with most good things in life there is a "but" involved. So, $5 million can be passed from one spouse to another directly and still qualify for the $5 million exemption, BUT, the surviving spouse must file an estate tax return (form 706) at the first death. This tax form can be daunting as it can be complicated and require appraisals and proof of values. Because virtually all 706 forms are personally reviewed by and IRS agent, the audit risk is very high.
There are other rules dealing with remarriage that will be the subject of another post, but for now just know that a surviving spouse is not allowed to stack exemption amounts should they remarry.
Under the new law, even when the exemption amount ($5 million) is passed directly to the spouse, they still get to use the $5 million exemption from the first death. As with most good things in life there is a "but" involved. So, $5 million can be passed from one spouse to another directly and still qualify for the $5 million exemption, BUT, the surviving spouse must file an estate tax return (form 706) at the first death. This tax form can be daunting as it can be complicated and require appraisals and proof of values. Because virtually all 706 forms are personally reviewed by and IRS agent, the audit risk is very high.
There are other rules dealing with remarriage that will be the subject of another post, but for now just know that a surviving spouse is not allowed to stack exemption amounts should they remarry.
Friday, March 4, 2011
Estate Planning Tax Update - Part 1/Change
I want to address some of the Tax Law changes and how they will affect Estate Planning. I was hoping this could be something we all could count on into the future, but, that is not to be. It looks like we will have to get used to the word change, at least for the foreseeable future. This is intended to be a series of short to semi-short writings on different aspects of the new tax law.
Part One - Change
On December 17, 2010, President Obama signed a new tax law that affects every estate plan in some way or another. However, there is no clarity as to how long this new tax law will continue to be in effect. It just happens to sunset, December 31, 2012, which just happens to be a presidential election year. I am too cynical to think that was done by accident.
If President Obama is re-elected, he will likely carry several more Democratic Congressmen and Senators into office with him. In that event, the Federal Estate Tax exemption will likely go down. $2 - 3.5 million seem to be the numbers bandied around. If there is a Republican in the White House in 2012, the federal estate tax exemption will likely remain the same or increase. If nothing is done, the new law sunsets and the exemption reverts to the 2001 level - $1 million.
On top of that, the Illinois Estate Tax Exemption is currently $2 million. Should the Federal Estate Tax find itself somewhere between $3.5 and above in 2012, the Illinois tax will likely remain at $2 m. If the Federal Estate Tax is allowed to sunset, returning to $1 million, the Illinois Estate Tax will likely re-couple with the Federal Estate Tax. That means that Illinois will take a share of the Federal tax amount, instead of maintaining a separate exemption amount.
Either way, it seems that both sides are content to allow this issue to be tossed around like a political football. Will 2012 bring us certainty? Clarity? Or, just more of the same wait and see attitude that has given us the band aid we are living with today?
With all this uncertainty, many people ask, "Why plan?" "Why not wait for some certainty and clarity and then plan?" The problem with that thinking is that even if the Estate Tax issue is settled, other issues will continue to change. The Stock Market, the Economic Recovery, unemployment, marriage, divorce, death, all these things and many more will bring change to everyone's lives.
That is why my practice model advocates updating and maintenance as part every estate plan. Plan for certainty, not destiny.
Part One - Change
On December 17, 2010, President Obama signed a new tax law that affects every estate plan in some way or another. However, there is no clarity as to how long this new tax law will continue to be in effect. It just happens to sunset, December 31, 2012, which just happens to be a presidential election year. I am too cynical to think that was done by accident.
If President Obama is re-elected, he will likely carry several more Democratic Congressmen and Senators into office with him. In that event, the Federal Estate Tax exemption will likely go down. $2 - 3.5 million seem to be the numbers bandied around. If there is a Republican in the White House in 2012, the federal estate tax exemption will likely remain the same or increase. If nothing is done, the new law sunsets and the exemption reverts to the 2001 level - $1 million.
On top of that, the Illinois Estate Tax Exemption is currently $2 million. Should the Federal Estate Tax find itself somewhere between $3.5 and above in 2012, the Illinois tax will likely remain at $2 m. If the Federal Estate Tax is allowed to sunset, returning to $1 million, the Illinois Estate Tax will likely re-couple with the Federal Estate Tax. That means that Illinois will take a share of the Federal tax amount, instead of maintaining a separate exemption amount.
Either way, it seems that both sides are content to allow this issue to be tossed around like a political football. Will 2012 bring us certainty? Clarity? Or, just more of the same wait and see attitude that has given us the band aid we are living with today?
With all this uncertainty, many people ask, "Why plan?" "Why not wait for some certainty and clarity and then plan?" The problem with that thinking is that even if the Estate Tax issue is settled, other issues will continue to change. The Stock Market, the Economic Recovery, unemployment, marriage, divorce, death, all these things and many more will bring change to everyone's lives.
That is why my practice model advocates updating and maintenance as part every estate plan. Plan for certainty, not destiny.
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