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PERSONAL ESTATE PLANNING
Estate Planning.
In preparing a personal estate plan, the following tools should always been considered:
1. Living Trust Agreements;
2. Pour-over Wills;
3. Durable Powers of Attorney for Health Care;
4. Durable Powers of Attorney for Property;
5. Irrevocable Life Insurance Trust (on the life of the primary income earner).
Estate Tax.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provides that federal estate, gift and generation skipping transfer (GST) taxes were to be progressively eliminated over a ten year period. Beginning in 2002, the estate tax was initially reduced until it was totally eliminated in 2010. However, if Congreass did not act to permanently eliminate the estate tax, the old rules, tax rates and exemptions would come back in 2011. The way things worked out, there was no estate taxes if death occurred in 2010, but if death occurs on or after January 1, 2011, under the sunset provisions of the act, the rates reverted back to the same as it was in the year 2002. However, a last minute change occurred, and in 2011, the exclusion was increased to $5,000,000, and the maximum tax rate was only 35%, rather than a scheduled 55%.
After failing to extend tax reform in 2010, Estate & Gift Taxes reappeared in 2011
In 2011 and 2012 there are much higher exemptions (a boon to the wealthy)
In 2009, Congress failed to extend the estate tax to 2010. Consequently, in 2010 there was no estate or generation-skipping tax. Moreover, Congress again failed to act during 2010, so the estate and gift taxes reappeared on January 1, 2011 – not as they were in 2009 – but as they existed in 2001. So in 2011, the exclusion became $5,000,000 and the top marginal rate was supposed to become 55 percent, not 45 percent as existed in 2009. But a last minute change reduced the top marginal rate in 2011to 35%. Amazingly, for 2012, because Congress failed to address the gift and estate tax examptions before the end of 2011, the high exemptions continued.
For 2012, the amount one individual can give another annually without incurring a gift tax remains at $13,000. But because the gift and estate tax are indexed for inflation, the $5 million lifetime gift and estate tax exemption limits will rise to $5.12 million - or $10.24 million per married couple.
In 2013, the gift and estate tax exemptions are both scheduled to revert to $1 million, unless Congress acts. Moreover, the top estate tax rate will snap back to 55%, with a 5% surcharge on taxable estates of between $10 million and $17.184 million.
Although there will be continued uncertainty until Congress addresses the reinstatement of estate and generation-skipping taxes, existing plans should be reviewed to determine the effects of the repeal, and to consider planning opportunities.
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Year
|
Top Estate Tax Rate
|
Exemption Amount
|
|
2002
|
50%
|
$1,000,000
|
|
2003
|
49%
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$1,000,000
|
|
2004
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48%
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$1,500,000
|
|
2005
|
47%
|
$1,500,000
|
|
2006
|
46%
|
$2,000,000
|
|
2007
|
45%
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$2,000,000
|
|
2008
|
45%
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$2,000,000
|
|
2009
|
45%
|
$3,500,000
|
|
2010
|
repealed
|
all
|
|
2011
|
35%
|
$5,000,000
|
| 2012 |
35% |
$5,120,000 |
The above chart reflects the significant changes that occurred beginning in 2002 and continuing through 2011:
The downside in 2010 was that the absence of an estate tax affected whether there was a stepped-up basis.
If you bought something in 1945 for $100, and now it’s worth $10 million, when you have stepped up basis, your estate pays a tax on the $10 million, but then your heirs receive that asset with a cost of $10 million. If they sell it the next day, they have no income tax to pay.” In 2010, when there was no estate tax, you didn’t get that stepped-up basis.
So in 2010 when there was no estate tax, the heirs would take that asset with a basis of $100, not $10 million.
Step-Up Exemption in 2010
There was still a step-up exemption for the first $1.3 million — and a $3 million exemption for assets that were inherited from a deceased spouse to a living spouse. After that, there was no step-up, meaning a $10 million sale in 2010 was subject to capital gains taxes. The estate tax rates are higher than the income tax rates, so in theory during 2010 that was OK — you'd rather pay the income tax rates, but it was a complication.
Another 2010 complication: If someone died with $5 million of assets, a fiduciary, or executor, allocated that $1.3 million step-up exemption as they saw fit. If one heir felt others were benefiting at their expense, the executor could have been sued.
And, of course, many people do not keep records back to when they acquired an asset. It is much easier to know the value of something on the day the person died.a he estate tax rates are higher than the income tax rates, so in theory during 2010 that was OK — you’d rather pay income tax rates, but it was a complication. |
For 2001-2009, the law preserved the rule that stepped up (or down) basis in an asset transferred at death to its fair market value at the owner's date of death. For 2010, the one year in which the estate tax is repealed, the step-up in basis is eliminated, and assets transferred at death generally take a carryover basis (but not in excess of fair market value on the date of death). Personal Representatives (i.e., Executors) are given the authority to allocate $1.3 million worth of increased basis (plus additional basis to compensate for lost loss carryforwards and built-in losses) to certain assets passing from the decedent, and an additional $3 million worth of increased basis to assets transferred to a surviving spouse, subject to certain rules. Additional basis can only be added to certain assets passing from the decedent which were owned by the decedent at the time of death. In no event can the additional basis be allocated such that an asset has basis in excess of its fair market value. Like the other estate and gift provisions, these changes sunset in 2011; thus the current step-up in basis for all assets transferred at death is reinstated in 2011.
____________________
The annual Gift Tax exclusion (currently $13,000 per donee), as well as the exclusion for payment of medical and educational expenses, continues to apply, as do the deductions for charitable and marital gifts. The unified credit against taxable gifts was at $345,800 (exempting $1 million from tax) through 2009, while the unified credit against estate tax increased during the same period. The following table shows the unified credit and applicable exclusion amount for the calendar years in which a gift is made or a decedent died after 2001
|
For Gift Tax Purposes: |
For Estate Tax Purposes: |
| Year |
Unified Credit |
Applicable
Exclusion
Amount |
Unified Credit |
Applicable
Exclusion
Amount |
| 2002 and 2003 |
345,800 |
1,000,000 |
345,800 |
1,000,000 |
| 2004 and 2005 |
345,800 |
1,000,000 |
555,800 |
1,500,000 |
| 2006, 2007, and 2008 |
345,800 |
1,000,000 |
780,800 |
2,000,000 |
| 2009 |
345,800 |
1,000,000 |
1,455,800 |
3,500,000 |
| 2010 |
345,800 |
1,000,000
|
none |
all |
| 2011 and 2012 |
1,750.000 |
5,000,000 |
1,750,000 |
5,000,000 |
| 2013 |
345,800 |
1,000,000 |
undetermined |
undetermined |
The gift tax applies to transfers by gift of property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule.
Generally, the following gifts are not taxable gifts:
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Gifts, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year,
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Tuition or medical expenses you pay directly to a medical or educational institution for someone,
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Gifts to your spouse,
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Gifts to a political organization for its use, and
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Gifts to charities.
In 2010 the lifetime exemption from gift taxes was only $1,000,000 with a top tax rate of 35%, but under current law the lifetime exemption from gift taxes has increased to $5,000,000 and the top tax rate remains at 35%. These numbers, however, will only be in effect for the 2011 and 2012 tax years. In 2013, the lifetime gift tax exemption is scheduled to decrease back down to $1,000,000 and the top gift tax rate will jump to 55%.
Annual Exclusion. A separate annual exclusion applies to each person to whom you make a gift. The gift tax annual exclusion is subject to cost-of-living increases.
| Gift Tax Annual Exclusion |
| 1998 - 2001 | $10,000 |
| 2002 - 2005 |
$11,000 |
| 2006 - 2008 |
$12,000 |
| 2009 - 2012 |
$13,000 |
For 2012, you generally give a gift valued at up to $13,000 each, to any number of people, and none of the gifts will be taxable. If you are married, both you and your spouse can separately give up to $13,000 to the same person in 2012 without making a taxable gift. If one of you gives more than $13,000 to a person in 2012, fee splitting rules apply.
Gift Splitting. If you or your spouse makes a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of the gift.
In 2012, gift splitting allows married couples to give up to $26,000 to a person without making a taxable gift.
If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion.
There are many aspects to an overall estate plan, which should properly be reviewed by an attorney and tax planner on an individual basis. This information is intended to give you a basic understanding of various aspects of estate planning, but it cannot substitute for a thorough review with your estate planning attorney. Preparation of Wills, Trusts and other estate planning instruments must be implemented as part of an overall estate plan. The estate plan should reflect your family, economic and tax goals. Thorough planning and review of each individual's needs, including their tax considerations must be discussed with qualified professionals.
To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained herein, unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of: (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any matters addressed herein.
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