Update on Estate Taxes

On December 17, 2010, President Obama signed “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act which significantly altered the rules concerning federal estate taxes, gift taxes and generation-skipping transfer taxes for the 2010 through 2012 tax years.  Once again the polarized Congress was incapable of reaching a bipartisan long term solution and instead bartered a short term “fix” that will expire at the end of 2012 unless Congress acts again to extend or further alter the current law.  In on other words the exemption amount, which has been generously increased to $5 million for the years 2011 and 2012 will revert back to $1 million as of January 1, 2013 unless Congress acts!  Obviously the intent is to leave this political “hot potato” on the table so that both sides can use it to their political advantage.  You can expect the Republicans to continue to argue for a total repeal of “the Death Tax” and the Democrats countering with keeping the tax as a means of making the very rich “pay their fair share”.

The bottom line is that if you happen to die in 2011 or 2012, you can leave up to $5 Million to your beneficiary without having to pay any federal estate tax.  And if you happen to be married, you can effectively transfer $10 Million to your beneficiaries, ($5 Million each) without the federal government taking a bite.  Note that the exemption amount does include gifts made during the grantor’s lifetime.  So, for the next two years almost everyone I know can breathe easy, but since there will have to be changes in the future, STAY TUNED!

Put a Will Check-Up on Your Calendar

As 2010 draws to a close, there remains a gray cloud of uncertainty over what will happen to the Federal Estate & Gift Tax, often referred to as the “Death Tax”. This tax is the tax imposed by the federal government upon your “estate” when you leave this planet for your heavenly pursuits, i.e., you die! The Federal Estate Tax was originally enacted in 1916 as a means for providing availability of funding to the federal government on a regular basis as opposed to having enacting emergency revenue raisers in times of national emergencies such as wars. The tax can take quite a bite out of inherited wealth with a top rate of 55% in addition to what states may charge. (Arizona does not charge an Estate Tax like many states do.)

In 2002, Congress passed a law that effectively was designed to wean away the Estate Tax by increasing the amount exempt from taxation through 2009 with all estates exempt for the year 2010. In other words, for those dying in 2010, their estates are not subject to any tax, at least as long as Congress does not act to retroactively impose the tax, which it can, and may do. Unless and until that happens billionaires (such as the late George Steinbrenner) can pass along billions of dollars of wealth without the feds taking the major cut they would have been entitled to if Congress had only gotten its act together. However the “repeal” only lasted through 2010 and further action of Congress was required to permanently “kill” the “Death Tax.” Consequently, in addition to the sounds of corks popping off of Champagne Bottles on New Year;’s Eve this year, we may hear distant gunshots as Millionaires and Billionaires in ill health decide to end it all early so as to leave their heirs the additional millions/billions that may not be available as of January 1, 2011, which brings me to the point of this article.

As of January 11, 2011, (under the law in effect as of the date of this writing, 11/19/2010), the federal estate exemption amount will drop to $1 million, including all insurance, which means if you have assets and insurance that exceed $1 million your heirs may be hit with a very heavy tax burden. If the value of your estate is invested in a real estate or a family business worth more than one million, your heirs may have to sell the asset just to pay the tax! If you presently have a “Simple Will”, and if Congress fails to reach agreement on raising the size of exempt estates, you need to have your estate plan reviewed! You may choose to set up a Trust or to utilize a slightly more complex “Disclaimer Trust” Will which will allow you to double the amount of your exemption.

Since Congress still seems to be gridlocked and the federal government is starved for cash, it is indeed possible that the lowering of the exemption to $1 million is possible. After all, it is much easier politically to tax dead people than it is to tax the living! If your estate approaches that figure you need to keep a close eye on this issue! Look to this website for further updates.