Guest post by Lena Rizkallah (learn more about Lena at the end of this post)
It’s the holidays and this is the time of year when we are reminded of all those who have left us this year. I’m not referring to the passing of our own family members, friends and coworkers, but the tragic deaths of the celebrities, socialites and business moguls that we’ve known and loved (or not).
The brilliant writer, J.D. Salinger, famous for “Catcher in the Rye” passed away this year, as did the talented fashion designer Alexander McQueen. Socialite Casey Johnson, child stars Corey Haim and “What ‘chu talkin’ ‘bout Willis?” Gary Coleman also died premature deaths. Singer Lena Horne, actors Lynn Redgrave, Dixie Carter, Dennis Hopper and John Forsythe passed away, as well as Nestor Kirchner, the former President of Argentina, and basketball legend Minute Bol. And let’s not forget New York Yankees owner George Steinbrenner.
I mention these people not because of their individual contributions to our lives and how these losses may or may not impact life as we know it. No, I bring this up because as we watch the shows that close out the year, as face after face of the celebrities who passed away are projected on our television screens, as tributes and speeches are made about the talent, beauty, genius and uniqueness of a particular dead celebrity or entrepreneur—I am thinking about their estates. In particular, how large and how much in estate taxes did their executors think they avoided because of the absence of an estate tax this year? And given the ballooning size of the US deficit, how much in revenue did our government almost miss out on because Congress forgot to fix the estate tax?
As we read year-end and best-of 2010 articles and watch the tribute shows, take a moment to try to add up the cumulative wealth of those being remembered. George Steinbrenner alone was worth $1.2 billion. Houston energy magnate Dan Duncan who died earlier this year had an estimated net worth of $9 billion, and television industry mogul John Kluge died with a $6.5 billion estate.
These estates were set to owe no taxes because tax law passed by the Bush Administration in 2001 and 2003 gradually increased the estate tax exemption over ten years while lowering the estate tax rate, and allowed for the estate tax to disappear completely in 2010. In the years leading up to 2010, estate planners believed that an estate tax-free 2010 would never happen, but Congress never got its act together long enough to change the law. As a result, we started 2010 with no estate tax, and the year was fraught with controversy about how to handle estate planning.
What’s worse is that barring any Congressional action on this, the Bush law mandated that the estate tax would return in 2011–at 55% with an estate exemption of $1 million, the lowest exemption amount we’ve seen for many years.
Now that President Obama signed the new tax law, we have more clarity on how to settle estates of people who passed away in 2010. According to the new bill, the estate exemption is set at $5 million ($10 million for married couples) with a 35% estate tax rate on remaining estate assets. In addition, people who inherit assets will receive a stepped-up basis on the value of assets passed to them. This is a change from the 2010 law which based taxation of inherited assets on their original cost basis, instead of their current fair market value. (The Bush law did allow a $1.3 million exemption and additional $3 million for married couples on inherited assets before the original cost basis rule would apply).
In addition, generation-skipping transfers and transfers made during life (gifts) will also receive a $5 million exemption.
These changes are retroactive to January 1 of this year, and this year, executors can choose to value and settle the estate based on the new estate law or on the Bush 2010 rules. It’s not easy to predict what estate law works best with certain scenarios, but it’s likely that estates worth less than $5 million may choose the new rules and the $5 million exemption, while larger estates may opt for no estate tax and a cost-basis valuation on inherited assets.
So at least in the short term, we have a solution to the estate tax dilemma. However, since the new tax changes are only in effect from January 1, 2010 until December 31, 2012, we may face another estate tax controversy down the road. In the meantime, consider making larger gifts to individuals and to trusts in order to take advantage of higher exemptions, lower estate and gift tax, and higher gifting limitations.
Let’s face it: the only things in life that are certain are death and taxes. If that’s truly the case, let’s shoot for a glamorous, easy death– and minimal taxes. I think most celebrities and tycoons will agree.
About the author
Lena Rizkallah of Mosaic Consulting is an attorney who focuses on legislative developments, tax and fiscal policy, and advanced strategies for investment and retirement planning and products. She also writes and presents on trusts, estate planning and charitable giving arrangements.
Susan Gunelius
Susan Gunelius is the Founder and Editor-in-Chief of Women on Business. She is a 30-year veteran of the marketing field and has authored a dozen books about marketing, branding, and social media, including the highly popular Ultimate Guide to Email Marketing, 30-Minute Social Media Marketing, Content Marketing for Dummies, Blogging All-in-One for Dummies and Kick-ass Copywriting in 10 Easy Steps. Susan’s marketing-related content can be found on Entrepreneur.com, Forbes.com, MSNBC.com, BusinessWeek.com, and more. Susan is President & CEO of KeySplash Creative, Inc., a marketing communications company. She has worked in corporate marketing roles and through client relationships with AT&T, HSBC, Citibank, Intuit, The New York Times, Cox Communications, and many more large and small companies around the world. Susan also speaks about marketing, branding and social media at events around the world and is frequently interviewed by television, online, radio, and print media organizations about these topics. She holds an MBA in Management and Strategy and a Bachelor of Science degree in Marketing and is a Certified Professional Career Coach (CPCC).
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