Berman & Asbel, LLP

Estate planning still needed despite new 2010 tax law

With great fanfare, Congress in its 2010 lame duck session passed lots of legislation that had been pending including a bill to extend the Bush-era tax cuts enacted in 2001 that would have expired at the end of 2010.  For a good summary of the bill, click here for one published by CCH.  On the estate tax front, in 2010, the estate tax was fully repealed and had Congress not acted earlier this month, the estate tax would have reverted to that in 2001 with estate taxation starting at $1 million with a 55 percent tax rate.  Under the 2010 legislation, starting in 2011, estate taxation has a threshold of $5 million with a tax rate of 35 percent.  In comparison, in 2009, the threshold was $3.5 million with a 45 percent rate.  There is an interesting feature to the 2010 bill in that for estates of persons who died in 2010, there is a choice. One option is to have zero estate tax but then have to calculate capital gain tax with modified carry-over basis rules after the first $1.3 million ($3 million to surviving spouse).  The gains under that amount can be calculated using the favorable "step-up" date-death basis valuation.  The other option is to apply the 2011 estate tax rates and have the benefit of the step-up valuation for all assets.  Some accountants will have a lot of numbers to crunch.  Even with this bill, a lot of legal uncertain remains due to the highly volatile political situation in Washington.

Now as is noted in a New York Times article, only a tiny percentage of estates of persons dying in 2011 will have to pay estate tax - 0.5 percent - as compared to 10.5 percent which had to pay the estate tax in 1977.  I am not here to say what is the proper percentage of estates that should be subject to the estate tax - it was probably too high back in 1977 given that the tax was originally intended to impact only the wealthiest estates.

One very interesting feature of the 2010 bill is exemption portability which it makes it possible for the unused portion of one spouse's estate tax exemption to be added to the exemption of the second spouse later when he or she dies.  Until now, to accomplish this required using planning techniques such as a estate tax exemption bypass trust.

The more important point for many families is that this 2010 tax bill DOES NOT remove the need for proper estate tax planning.   Why?  Because as was the case in 2001, Congress wanted to provide the economic stimulus of tax relief but has failed so far to address the long-term budget deficit and debt problems.  Instead, the entire 2010 tax bill with all of its tax cut extensions and related provisions expires at the end of 2012.   Unless Congress acts again within the next 2 years, we will again face reverting back to the law as it was in 2001 which, for estate taxation means an exemption that drops to $1 million, a tax rate of 55 percent and no provision allowing for unused exemptions to be transferred from one spouse to the other.  As many pundits have described it, this is the proverbial "kicking the can down the road."  Many political observers believe passing another bill in 2012 will be even more difficult because control of Congress will be divided and there will be a Presidential election campaign in that year.

Looking past the end of 2012, if a person or a couple have significant equity in their home, savings in a 401(k) or IRA and life insurance on which they control who is the beneficiary (most people who have life insurance have such control), it is easier than one might first realize for individuals and couples to get into a situation where they may be subject to federal estate tax.  It is therefore essential to continue to plan estates on the assumption that the 2010 tax breaks will expire.  Because of the uncertain nature of future tax laws with these expiration dates and changes in control of Congress and the White House, I and many attorneys have adjusted how documents are prepared to provide flexibility to survivors and beneficiaries as to whether they actually make use of estate tax savings provisions.  In the current political environment, there are proposals ranging from outright abolition of estate taxation to keeping it with the exemption dropped back down to $1 million.  This is, to put it mildly, an uncertain legal environment.  As much as possible, I try to structure wills and trusts in such a manner that families have the ability put off deciding whether to use a particular tax device until the person who has created the will or trust actually passes away rather than being locked in at the time the document is signed.

Bottom line:  Don't assume that just because for now that exemption is up to $5 million that you may not be subject to that tax later.  Better to plan and not need than to need and not plan.

Readers should not solely rely on this note but should consult with a competent attorney licensed in their state. You can also find more information in my firm's websites on Family Law and Wills and Estate Planning and Administration.

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