2011 Tax Laws: Good News, Bad News

A First Look at the New "Temporary" Federal Estate Tax Law

Throughout 2010, several of our posts noted that the federal estate tax had expired but that under then-current law, the estate tax was due to come back in 2011 as a more onerous tax. We commented and provided links, for example, discussing the George Steinbrenner estate, some $600,000,000 that would not be subject to the federal estate tax because he died in 2010 instead of 2009 or 2011. Then, in the last days of 2010, a deal was cut between the President and Congress as part of a broader tax package. The estate tax came back but in a (relatively) more benign form.

At this point, we have been able to analyze at least some of the specifics of the new estate tax. It was an interesting compromise. First, the good news: estates worth up to $5,000,000 are excluded (are not taxed) and the highest bracket, at 35%, is significantly lower than the highest bracket of the old tax (45% in 2009 but once as high as 55%). More good news, the $5,000,000 exclusion amount is "portable" which means that a married couple can more easily shelter $10,000,000 from the tax (without the necessity of a special trust).

That "portability" provision is especially interesting. Congress was able to determine that you should be able to "port" only the unused portion of the exclusion of one spouse. You can't accumulate unused exclusions from serial marriages.

But, yes, there is some bad news. The new estate tax is also temporary and will expire in 2013. And, the new estate tax is retroactive - - in a way. Executors of decedents who died in 2010 may elect to have 2010's rules carried over to 2011. Why wouldn't all executors so elect? There is a complex interplay with the capital gains tax and the determination of the cost basis of assets. Some executors will have to perform a careful analysis before deciding how they want to proceed.

These changes apply only to the federal estate tax. States have their own estate tax laws. Connecticut taxes estates over $3.5 million. New York taxes estates over $1.0 million. In both cases, the tax rates are not anywhere near the federal rates but can apply to estates that are excluded from the federal estate tax.

The discussion above is somewhat simplified and we will return to each in future posts to explain these provisions in a little more detail. For now, here are some general takeaways:

• Most estates will not be taxed at all and the focus of most people's estate planning should be on what they want to accomplish with their assets, not on tax avoidance;
• The temporary nature of these provisions keeps the premium on flexibility for those estates that might be on the cusp of the taxable thresholds;
• As always, life insurance, 401(k) plans, jointly owned real estate and other "non-probate" assets can put an estate over the taxable threshold - - people tend to be unaware how "non-probate assets" can build up their taxable estate;
• It may be a good time to review your asset and your will with an estate planning attorney - - if you haven't done so in the last three to five years, it's probably overdue.
 

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