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.

Million-Heirs Cashing in on the Estate Tax Lapse

George Steinbrenner passed away earlier this week. The man left behind an extraordinary legacy, a controversial reputation, and an estate estimated at more than $1.3 billion by Forbes Magazine.

With the estate tax lapsed this year, Mr. Steinbrenner’s heirs may not have to pay hundreds of millions of dollars in taxes on what they’re about to inherit.

According to the Wall Street Journal, wealthy people who die before 2011 will spare their heirs a hefty 45% tax fee. This situation has all the makings of a potentially great homicide novel (someone hastens the death of a rich uncle), not to mention a plethora of legal and ethical quandaries.

It’s never wise to make life and death decisions based on finances and estates. But when the New Year is rung in, the Journal reports, the top tax rate will jump to 55%, and the federal estate tax exemption amount will shrink from $3.5 million per individual in 2009 to just $1 million.

In the meantime, we’ll watch the Steinbrenner situation play out. “The Boss” is survived by his wife and four children. The ABA Journal posts that a marital deduction likely would have applied if he had died in 2009 or 2011.  Under federal law, probate transfers among spouses are tax-free. But, according to Forbes magazine, “the absence of the estate tax could set up an intriguing scenario in which Steinbrenner’s spouse could disclaim a bequest, allowing assets to move to the next generation.” Of course, his estate is going to be very complex and not a guide for more typical situations.

For those of us not needing to worry about the millions or billions we leave behind for our loved ones, it’s best to consult an estate planning attorney who can help make decisions based on law (regardless of how confusing it may seem).

Yes, Virginia, there is an Estate Tax

According to Investment News, Virginia became the first state to pass a law requiring that estates be treated as if it is still 2009 -- unless Congress acts first.

Why would Virginia do that? Many wills include formulas that are based on the existence of an estate tax. This article points out how the formulas can distort the intentions expressed in someone’s will - - to the extent of leaving one’s children nothing instead of $3.5 million.

Of course the issue does not apply at all to most estates because they are too small to be taxed in the first place. There was no tax on small estates in 2009, and there is none in 2010.

In our practice, for estates that might have been taxable, we have been using “disclaimer” provisions that allow a surviving spouse to decide whether tax-minimizing steps are necessary. The “disclaimer” technique is not a cure-all for an uncertain tax environment, but it works in many cases.

It would be better if Congress simply decided to end the uncertainty and pass some kind of estate tax law.

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Reversal of Fortune: The Estate Tax Law Update

As of January 1, the federal estate tax went away for a year. Under current law, it’s scheduled to return at a higher rate next year. Personally, I’m surprised that Congress allowed the estate tax law to lapse, and I'm curious to see the ramifications.

According to the Wall Street Journal, families facing end-of-life decisions in the immediate future are finding that the change is making one of life's most trying episodes only more complex. Beneficiaries stand to inherit a lot more for a death this year than a death after December 31, 2010. The ethical dilemma is clearly significant.

Of course, what Congress giveth, Congress can taketh away. As discussed in the Journal article, the repeal of the federal estate tax is accompanied by reinstatement of the capital gains tax on property passing to beneficiaries.  Previously, when property passed to beneficiaries, the property received a “step up” in basis, wiping out the capital gains tax. The net result is that many estates, including smaller estates, will be taxed anyway but it just won’t be called an estate tax.

The Journal says that the uncertainties of the new tax law (will it be changed? will it be retroactive?) are “forcing family legal advisers to craft various provisional financial-planning strategies that can be undone later if the rules do change.” According to the article, at least one person has added the prospect of euthanasia to his estate-planning mix.  That might be a little extreme.

For a more conventional planning environment, we look forward to some kind of retroactive resolution.

Gift Tax Exclusion Remains $13,000 in 2010

The Tax, Trusts and Estates Law Monitor recently reported that the Gift Tax Exclusion Amount, indexed to the cost of living, will remain $13,000 in 2010.

As explained by TTELM: “The annual exclusion permits a taxpayer to gift $13,000 annually to any beneficiary without being required to use his or her $1 million lifetime gift exemption amount.”

The gift tax exclusion amount is an important estate planning tool since the amount can be doubled in the case of a married couple and applies to any number of persons. Less well-known, other excluded gifts may be made for tuition expenses and health care provided payments made directly to the educational institution or provider.

Estate Tax Update!

According to the Tax, Trusts and Estates Law Monitor, it appears increasingly likely that the imminent federal estate tax legislation this year will be a one-year “patch,” or a one-year freeze of the 2009 rules (a 45% estate tax rate and a $3.5 million exemption).

The Monitor states that the Association for Advanced Life Underwriting (“AALU”), an important trade and public affairs group, believes that permanent reform is less likely this year and that enactment of a one-year patch is the most likely outcome. The AALU predicts that the Senate debate on the estate tax will extend to mid or late December.

What this means: Under current law, estates of $3.5 million or more are subject to a federal estate tax which is scheduled to be repealed in 2010 but brought back in 2011 for estates of $1 million or more.  The "one year patch" extends the tax for estates of $3.5 million or more through 2010 while Congress decides what to do for 2011 and beyond.

We will continue to post updates regarding this legislation as they arise.

"Cliff Notes" on Connecticut's Estate Tax Changes

Connecticut has eliminated the “cliff” from its estate tax. The Danbury News-Times, along with other media and legal blogs, reports that this change to Connecticut’s estate tax law, along with other significant changes, will go into effect for decedents who die on January 1, 2010 or later.

The aforementioned “cliff” refers to the fact that under prior tax law, an estate of $2,000,000 was exempt from taxation. However, add one more dollar to that, and the entire $2,000,001 was taxed, resulting in a tax liability of $101,700. With the new law, estates of $3,500,000 or less will not be taxed. This is similar to the federal estate tax threshold (or at least this year it is).

Under current law, the federal estate tax will be abolished next year, only to come back in 2011 with a threshold of only $1,000,000. The expectation is that the federal estate tax will be modified. On the other hand, that expectation has existed for some 8-10 years.  A clear explanation of the status of the federal estate tax is provided by this recent Wall Street Journal article.

In New York, the state estate tax threshold is a mere $1,000,000. But, in either Connecticut or New York, the federal tax takes a far bigger bite, with a marginal rate up to 45%. That’s right, 45%.

Here’s some good more news for Connecticut: estate tax rates are now being reduced by 25 percent, with a new maximum rate of 12%. But the estate tax and a return will be due six months after date of death instead of the current nine months.

In all three jurisdictions, (federal, Connecticut and New York), your “estate” for tax purposes includes almost everything you own: property, IRA’s, 401(k)’s, pension plans, the proceeds of life insurance and “In Trust For” accounts.

And one more point of potential confusion, specifically with respect to life insurance: the fact that beneficiaries do not pay income tax on the proceeds does not mean that the estate won’t pay estate tax.  A substantial life insurance policy can be enough to "tip: an estate into a taxable bracket.

A final piece of advice: take care of yourself and your loved ones.

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Annual Gift Tax Exemption Increased to $13,000

The Utah Business, Real Estate and Estate Planning Blog, in a post by Matt Fanhauser, has alerted us to an increase in the federal annual gift tax exclusion, effective January 1, 2009, to $13,000 or, when a spouse joins in the gift, $26,000.

Federal tax law provides that the exclusion amount increases with inflation but only by $1,000 increments. Thus, it does not increase every year but only when the formula for the increase results in a $1,000 increase.


The annual gift tax exclusion is important for small business owners because lifetime, tax-free gifts provide a way to reduce the federal tax bite on estates that potentially would be taxable at a rate of 45%. 


We have always included within our mandate to discuss litigation issues the discussion of appropriate steps one may take to reduce the likelihood of often bitter litigation by one’s beneficiaries. That means a developing a good estate plan which, in part, may include a plan for making tax-free or discounted gifts during one’s lifetime.