Guest post by Lena Rizkallah (learn more about Lena at the end of this post)
It seems that the more things change the more they stay the same. Take the recently enacted Tax Reform Bill of 2010, which extended the Bush tax cuts and certain individual credits and incentives, business write-offs, and education and energy benefits. This bill helped to clarify certain tax rates and created some great opportunities for financial planning. For now. Because, like the tax laws that implemented the Bush tax cuts, the provisions within the new tax bill will expire either after 2011 or 2012. So while we’ve got the “change” we needed—relief from the uncertainty of the expiring Bush tax cuts—that relief, like the past laws, will be short-lived and will likely be followed by another bout of uncertainty. This is a great example of “kicking the can down the road.”
The Tax Bill also addressed the estate tax, which many believed was in need of an overhaul. Most advisors and estate planners believed that Congress would finally agree to apply the 2009 estate tax law to the next few years, allowing for a $3.5 million estate exception and a 45% tax rate. To the surprise of many, the bill increased the estate exemption further than expected and set the estate, gift and GST exemptions at $5 million and the estate, gift and GST tax at 35% for 2011 and 2012.
This is great news for individuals with large estates. Now, couples may make combined lifetime gifts or transfers at death equal to $10 million. Any additional assets left over would be taxed at the lowest estate or gift tax rate we’ve seen in many years.
The bill allows executors settling estates of individuals who died in 2010 to choose between the new 2011 estate tax rules or the 2010 rules which included a modified carryover basis regime but no estate tax. In order to choose this regime, the executor must file form 8939 before September 19, 2011. It’s very likely that estates worth $5-10 million or less will choose the 2011 estate tax regime; those with larger estates (like Yankee owner George Steinbrenner) may choose the 2010 regime and owe no estate tax but modified carryover basis rules apply.
Several planning opportunities arise as a result of the estate tax changes. For one thing, because the gift exemption is increased to $5 million per person ($10 million per married couple), this could be a great time to gift highly appreciated assets to children. In this way, couples can maximize their gifts without owing capital gains tax on the sale of the asset. In addition, many couples can use their gift exemptions to purchase life insurance to fund an Irrevocable Life Insurance Trust, an excellent way to transfer assets tax-free to beneficiaries.
The tax bill also created a unique opportunity for married couples to preserve their estate and gift exemptions through portability of the exemption. Under prior estate tax law, if a couple wished to preserve both estate exemptions, they had to establish a bypass trust and upon the death of the first spouse, transfer assets equal to their exemption amount into the trust. The trust then would pay out income for the benefit of the surviving spouse during his or her life. At the death of the second spouse, the remaining assets in the trust are paid out to the trust beneficiaries/children.
With the new portability provision, each couple may preserve their joint estate exemption without the expense of establishing a trust. At the death of the first spouse, the surviving spouse must file an estate tax return, even if no estate tax is due, and indicate that he/she will be preserving the spouse’s remaining exemption. The surviving spouse may then use the combined exemption to make lifetime gifts, to fund trusts or leave outright at death. In addition, even if the second spouse remarries, the exemption of the first spouse will still be portable to the surviving spouse (although the portability rule only extends to the first deceased spouse and cannot be elected and combined with the exemptions of preceding spouses).
Remember that the portability provision only extends to a couples’ federal estate exemption. Sixteen states and the District of Columbia have a separate state estate exemption, which may be considerably less than the $5 million federal exemption. In those cases, a bypass trust may still be a useful estate-planning tool, possibly combined with lifetime gifting strategies. In addition, some couples will choose to establish a bypass trust because it allows for creditor protection.
Without Congressional action to extend the estate, gift and GST exemptions and tax rates, these provisions will revert to 2001 rates (55% estate, gift and GST tax rate and $1 million exemption). So grab hold of this can while you…can…before it gets kicked too far down the road! Although the extensions are temporary, it’s still a great time to take advantage of low tax rates, utilize smart gifting techniques and combine the portability exemption with certain trusts to maximize estate tax planning.
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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