Estate Tax Update

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("Act"), which became law in December, 2010, made significant changes for 2011 and 2012. At the beginning of any year, it is a good time to assess what those changes are, and what it means for your estate plan.

Changes Made By The Act

The Act applies only for 2011 and 2012, after which the estate tax reverts to what it was in 2001.  The most significant change for the next two years is a change in the exemption amount, setting it at $5 million, so that anyone dying with $5 million or less will owe no estate tax.  For married couples, the surviving spouse can use the unused portion of the deceased spouse’s exemption.  This means that married couples may leave estates of as much as $10 million before owing any estate tax. 

This is very good news for most.  However, if you have an existing estate plan which anticipated and planned for an estate tax, this new law could lead to some very surprising and unwelcome results.  For example, consider a couple who created an estate plan leaving a family trust a sum equal to the federal exemption amount when the first spouse dies, and the balance to the surviving spouse. A plan like this made sense for many estates a few years ago when the exemption amount was lower, but using the same plan in 2011, if the deceased spouse’s estate is  $5 million or less, would leave the entire estate to the family trust, with nothing for the surviving spouse!

On the other hand, for those with smaller estates who have existing estate plans which do not anticipate an estate tax due to the large exemption amount, they may be very surprised if death occurs in 2013 or after and the 2010 Tax Relief Act has expired without Congressional action, leaving a much less favorable estate tax and a resulting estate tax bill which erodes much of their estate.  As it stands now, without additional legislation, the exemption amount for each person will revert to $1 million in 2013 and the portability of the deceased spouse’s exemption will cease.

Beyond the estate tax, the new Act also made changes to the gift and generation-skipping taxes which may make it more favorable for you to make gifts during the next two years.

What Should You Do?

The most important planning action today is to make sure that your current estate planning documents will work with today's estate tax laws, and to build in flexibility to anticipate changes coming in 2013.  At the very least, a review is in order.  In many cases, it may be necessary to amend your existing documents.  This is also a good time to confirm that your assets are properly titled to work with your estate planning documents. 

Remember also that an estate plan is not just about taxes.  It is about controlling your future and taking care of your present.  Has your situation changed?  Your health?  Your family's situation?  Do you now need to change who has the power to make your medical and financial decisions, or whom you have named to administer your estate when you are gone?  Do you need to provide for someone with special needs? Are those you have named in your will or trust to receive your assets still your desired beneficiaries, or are changes needed?

Take charge of your own future.  We would be delighted to meet with you at your convenience if you would like to explore any of these issues or review your existing documents.

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