With the Federal Estate Tax Set at $5 Million, Escaping the State Death Tax Is Now An Issue For Migrating Seniors
March 8, 2011
For wealthy seniors, state death taxes may now be a big issue, especially if the seniors have the ability to relocate to a “death tax” friendly state.
The federal estate tax is set (for at least another two years) but we still expect some states to continue making changes to their own estate tax. The fact is that state governments are caught between a rock and a hard place. According to an article in Forbes Magazine, “The changing state landscape… reflects a lot of ambivalence by state officials themselves. They want the estate tax revenue, but worry about chasing wealthy seniors across state borders.”
If you’re looking for an estate-tax-friendly state to which to retire you can check out the link to the map in the Forbes article; but before you move be sure to do your research. Just because a state has no estate tax (or a high exemption amount) one year doesn’t mean it won’t change the next. The best strategy is to be familiar with the state’s history. How long has their estate tax been in place? Has there been any legislation proposed recently regarding the tax? How likely is it that their tax policies will remain the same as they are when you move?
Illinois recently made changes to the state laws regarding estate tax, and other states that are most likely to make changes in the future include Hawaii, Ohio, Connecticut and Vermont. “But don’t count on these efforts… even if you get relief one year, the levy can go up again the next.”
As always, the best strategy is to plan ahead, review your plan often, and have a knowledgeable estate planning attorney on your side.
What to Expect from Estate Taxes in 2011
December 22, 2010
It has been a long and uncertain year for anybody interested in the future of the estate tax, filled with a few ups, a few downs, and a lot of speculation. But after the recent passage of the new bipartisan tax bill all of the confusion and speculation is finally at an end, and it’s very close to what we anticipated early last week. The bill is good news for most taxpayers; the Wall Street Journal says there are “many winners, a few losers,” and according to the New York Times “Almost no one will have to worry about paying the estate tax under the tax legislation just approved by Congress.”
Here is a brief overview of what you can expect in 2011:
New Estate Tax Exemptions and Rates: The new bill sets the estate tax exemption at $5 million per individual ($10 million per married couple), with amounts over the exemption taxed at a 35% rate. This is opposed to the $3.5 million exemption and 45% rate some lawmakers were hoping for.
Tax Election Option for 2010 Estates: As mentioned in a previous post, this is one of the biggest parts of the new bill. There may have been no estate tax in 2010, but there was also no “step up in basis,” meaning that heirs selling inherited assets were taxed based on the original acquisition cost of the assets, not on their value as of the date of the taxpayer’s death, as is usually the case. This led to a higher tax paid on the assets if and when they were sold, in spite of the lack of estate tax. Tax election gives 2010 estates the choice of whether to use 2010 or 2011 tax rules—a happy option for 2010 heirs.
Estate, Gift, and Generation-Skipping Taxes: In recent years these three levies have had varying exemption levels, making gift giving and succession planning a challenging exercise at best. The unification of all three makes tax planning and giving gifts to grandchildren much easier than it used to be.
Individual Income and Payroll Taxes: The new bill wasn’t just about estate taxes; it also extends the Bush-era income tax rates; this is good news as it prevents a rise for nearly all taxpayers.
How Long Will It Last? We’re all glad that the waiting is over and we finally know what to expect, but the new law is only effective through 2012, at which point the provisions will “sunset.” So we have a two year reprieve, but the estate tax issue is far from over and we will have to revisit the issue again toward the end of 2012.
With the threat of high estate taxes out of the way does any reason remain to create (or update) your estate plan? Absolutely!
Estate planning is about more than just planning for taxes, it’s about taking control of your assets and choosing how your estate will be distributed. Divorce, second marriages, planning for college, charitable gifts—these are just a few of the reasons why estate planning is essential regardless of the state of the estate tax.
At the very least, the recent fluctuation of the law means that you’ll want to have your existing plan professionally reviewed and updated to ensure you don’t have any outdated clauses that could negatively affect your heirs.
Estate Tax Update: “Clarity” is Here
December 20, 2010
It looks as if the long and weary road to estate tax clarity ended on 12/17/2010 when President Obama signed the compromise tax package negotiated with Republican leaders.
Here are some quick highlights:
Tax Election for 2010 Estates: This is one of the biggest parts of the deal. The bill gives 2010 estates the choice of whether to use 2010 or 2011 tax rules. This is good news because it gives the estates of persons who died in 2010 a choice whether to be reated under the “old law” (with less favorable capital gains features but an unlimited estate tax exemption) or under “new law” (with more favorable capital gains features and a generous $5 Million/person estate tax exemption).
Unification of the Estate, Gift, and Generation-Skipping Taxes: In recent years the gift tax and estate tax exemptions have been different, complicating succession planning for family businesses and other matters. With the new deal, however, there will be a simple $5 million per-individual exemption for both gift tax and estate tax. The unused gift tax exemption could later be used upon death.
And of course we can’t have a conversation about estate taxes without discussing Effective Date and Duration: The effective date of the new provisions is set to be January 1, 2011. However, the new law only has a two (2) year term and then sunsets as of 12/31/2012. What this means is that the new tax package may be only a temporary reprieve, and we could be going through all of this again in 2012-2013.
Stay tuned. We will be writing more on this topic very soon.
Are You Prepared For The Return Of the Estate Tax on January 1st?
November 30, 2010
Q. My wife and I have a Living Trust and a combined estate worth roughly $2 million, including the equity in our home. I understand that the federal estate tax returns on January 1, 2011, and that couples having a combined estate worth more than $1 million may once again be subject to tax. Is this true? Is there anything we can do to about this?
A. Yes and yes. As things now stand, the federal estate tax is scheduled to return with a vengeance on January 1, 2011. For individuals who pass away after that date, the estate tax exemption will drop to only $1 Million per person, and the excess above that amount will be subject to a very hefty estate tax that can be as high as 55%. In your case, if your trust leaves everything outright to your spouse without special “tax savings” provisions, the tax that will be due upon the death of the survivor owning a $2 Million taxable estate would be approximately $435,000.
While Congress could still act to change that result, legislative efforts over the last several years to do so in anticipation of January 1, 2011, have thus far failed.
Background: During the last decade, the exemption from estate tax gradually went up each year from a starting amount of $675,000/person in the year 2000, all the way up to $3.5 Million/person in the year 2009 and, for persons dying in 2010, there is no estate tax whatsoever. For many persons who designed their estate plans during the last decade and whose estates were valued at less than the applicable exemptions, estate taxes became less and less of a concern and many plans were put in place that did not incorporate tax planning. This often made sense when the exemptions were greater than the value of one’s estate, but tax planning now suddenly becomes important once again for many folks. Consider that the value of the equity in your home, a 401K, plus some savings & investments can easily add up to more than $ 1 Million, once again exposing your estate to tax upon death.
With the exemption scheduled to drop once again to $ 1 Million and the federal estate tax scheduled to return at a rate of 45% to 55% for amounts above that, tax planning once again becomes important. This is especially so in your situation. Without proper tax planning, your children would be faced with a hefty tax bill and might need to sell some or all of your estate in order to raise money to pay the tax by the due date, nine (9) months after death of the surviving parent.
The good news: There are strategies that may reduce or even eliminate this burden, with more strategies available to married couples. However, they must be set up during your lifetimes. These may include creating “sub-trusts” within your Living Trust which would be “activated” upon the first death in order to preserve the decedent-spouse’s full exemption. This technique can effectively double the exemption over the span of two lifetimes; using life insurance to fund the anticipated tax liability; and, making intra-family gifts during lifetime to reduce the value of your taxable estate. Other available strategies are sometimes known by their funny sounding acronyms, e.g. QTIP, ILIT, QPRT, GRAT, IT, GSTT. If you also wish to design your plan so as to permit access to available government benefits to help pay the cost of long term care, the strategies might also include creating MIDGTs or VIDGTs to protect the home. Our recommendation: have your plan reviewed by a competent professional. An ounce of prevention may be worth a pound of cure.
Prepare Now for an Uncertain Future
October 14, 2010
There’s a useful saying that goes something like this: “Expect the best, but prepare for the worst.” Never has that saying been as useful as it is right now in regards to asset protection and estate planning. As Laura Lallos mentions in her article in the Morningstar Advisor, “Estate attorneys are trained to prepare for every contingency. But how do you plan for the unimaginable? Who would have predicted a U.S. tax system with no estate tax at all–and no certainty about what the estate tax will look like in 2011?”
Planning for the future when the future is so foggy is a challenge at best, but this unique year for taxes offers some once-in-a-lifetime opportunities for giving and saving as well. This seems to be a time of contradictions. As the article points out, “The best strategy that financial advisors and attorneys can pursue now is to prepare their clients for the worst. On the bright side, some clients can also seize opportunities created by the gaping holes in the tax law for 2010.”
The article suggests a number of strategies that you can implement now to prepare for an uncertain future. Some of these include:
Give monetary gifts now, when the gift tax rate is a low 35%, in order to lessen your taxable estate. Better still, gift away assets, such as real estate, that are likely to appreciate in the future.
Take advantage of the one-year-only lapse in the Generation Skipping Transfer Tax.
Create a Grantor Retained Annuity Trust before the end of October to take advantage of the currently very low Section 7520 rate.
See your estate planner and make sure your estate and asset protection plans truly are “prepared for the worst.” We may not yet know what next year will bring, but that doesn’t mean we can‘t take steps to ensure our clients are prepared for whatever the future may hold.
How to Prepare for Dismaying Changes to Estate Tax Law
September 19, 2010
This may seem like we’re listening to a broken record, but once again Congress’ inability to act is creating uncertainty in the estate-tax-planning world. We’re little over 3 months away from a major upheaval in the estate tax, and according to the New York Times the upcoming law is likely to cause a lot of grumbling unless Congress takes action. And it’s no wonder when the new law will mean that more families are taxed at a higher percentage:
“The amount of each estate that is exempt from estate tax is scheduled to become $1 million in 2011 (down from $3.5 million in 2009, when the tax was last in effect). The tax on the balance is to rise to 55 percent in most cases (up from the 2009 rate of 45 percent). So now is the time to consider the various tax strategies available.”
What this lower exemption rate really means, however, is that more families will be caught off-guard when a loved one passes away and the survivors are suddenly hit with a massive tax bill.
That is unless families start planning now.
The Times article mentioned above suggests that “the easiest way to reduce the tax bill is to give as much as $13,000 a year each to as many people as you like — which you can do without paying gift tax;” but when you consider how little $1 million really is (especially when the value of your home, retirement savings, etc. are all included when adding up your total assets) we’re guessing that there are a lot of people out there who are over the exemption amount, but don’t feel they can afford to go handing out $13,000 every year. Much more appealing are some of the other planning strategies suggested in the article, including:
- “Buy a one- or two-year [life insurance] term policy to cover the tax bill if the exemption amount is only $1 million.” If you want to cover the risk that you might die during the next year or so during a time where the estate tax exemption could be low relative to the value of your estate, the policy will help your heirs cover what could be a hefty tax bill. If Congress later increases the exemption so that you no longer need this protection for the excess, the policy could then be canceled;
- “Create a trust.” The article suggests a GRAT (Grantor Retained Annuity Trust), which is a great tool for assets with depressed values that are expected to appreciate during your lifetime; but for married couples simply looking for a way to protect their children from a hefty federal estate tax down the road a Credit Shelter Trust may be a better option.
There are a number of other ways you might be able to prepare for the coming estate tax upheaval—the best way to protect your own family is to contact an estate planning attorney and ask about your options.
Planning to Live Through the 2010 Estate Tax Repeal? You Can Still Save on Taxes
September 2, 2010
It is common knowledge that 2010 is a great year for heirs. If you didn’t know about the 2010 estate tax repeal, all the media coverage of George Steinbrenner’s recent death (and his heirs’ lucky tax break) probably alerted you. Everybody is saying that 2010 is a good year to die… But what about those of us who plan to live through 2010?
According to the New York Times even hale and hearty individuals can save on their taxes in 2010—it just takes a little more planning. “A bigger issue [than the estate tax]… has become the gift tax, which is linked to the estate tax to prevent people from giving away their fortune in life to avoid taxes at death. It now stands at 35 percent, the lowest rate since the 1930s.” The gift tax is a tax on money or property that you give to another individual while you are still living. Currently an individual may give up to $13,000 per year per recipient (or up to $26,000 if you give as a married couple) without incurring gift tax.
If you’re a wealthy parent or grandparent trying to decrease your taxable estate through gift-giving, this is the year to do it for a number of reasons. First, of course, is the historically low 35% gift tax rate. Second, “in addition to the historically low rate, another reason to make sizable gifts this year is that the values of many assets are still depressed. Long-held stocks, real estate and shares in private businesses could all increase in value, and giving them away now will allow them to appreciate with your heirs and not in your estate.” A final reason to consider giving your large gifts before the year is over is that the 35% rate won’t last forever; the gift tax is expected to rise to 55% next year.
How can you take advantage of this lucky confluence of events? Well, as always when you’re dealing with large sums of money (not to mention dealing with the IRS), you’ll want to be careful. We do NOT recommend that you simply write a check for $13,000+. Contact your estate planner or your financial planner to find out how you can safely reduce your taxable estate while giving security to the people you love. A very important caution however: if you believe you may need long term care in the near future, gifting away assets now could make you ineligible for a government long term care subsidy under the Medi-Cal program. Talk to your Elder Law attorney about this before you make the gifts.
Debunking 5 Common Estate Planning Myths
August 28, 2010
There are five common myths that frustrate all estate planners—particularly because we know that not only are they patently untrue, but also because their continued circulation can be harmful.
1. Estate Planning is only for rich people. This is probably the single most common estate planning myth there is—and it is a myth. When people add up the value of their home, their life insurance, savings, retirement account, etc., etc., etc. they often find that they are much closer to being a “rich person” than they thought. Not only this, but as we’ll get into in more detail below, estate planning is not only about saving on estate taxes, it’s also about controlling your wealth and protecting your own needs when the unexpected occurs. It is also about planning for long term care, an expense often overlooked.
2. “I have plenty of time.” AKA: Only old people need estate plans. First of all, just because you’re young doesn’t mean bad things can’t happen to you. But you know this, and anyway, this post is not about fear. Unexpected tragedies aside, an estate plan is useful even when you’re young because an estate plan is not just about death. A good estate plan will include not only a will, but also a healthcare directive and HIPAA Authorization (both of which are useful if you find yourself facing a surprise stay in the hospital), Power of Attorney documents (which you may need if you ever travel outside the country or are otherwise unable to sign for yourself on financial or legal documents), and legal documents relating to minor children (such as medical authorizations—an essential document if you leave your minor child with a babysitter for any extended period of time.)
3. Married people don’t need estate plans. While it is true that a married person with straightforward wishes for the distribution of their property has less need of estate planning, it does not necessarily follow that they can skip estate planning altogether. Under normal circumstances, any jointly held property will pass to the surviving spouse upon the death of the first spouse… But what happens if the surviving spouse gets re-married? What about the property you would specifically like to go to your children, or to your parents or siblings? And what if both you and your spouse die together? These are the reasons why even married people should consider drawing up at least a simple plan.
4. All I need is a quick will and I’m done. A quick will is certainly better than no will. And if you want to be technical, you don’t even need a quick will; after all, your state of residence has a plan already in place for you. The problem is that it may not be the plan you want. There is a saying that “anything worth doing is worth doing well.” This goes for wills (or any other legal document) as well. If you want the basics you can have the basics. But if you want the best, you’re going to need to spend a little more time on it.
5. Estate Planning is only about money. Although money is often one of the main motivating factors behind creating an estate plan, money is absolutely not what estate planning is all about. Estate planning is about people. It’s about your family and doing what’s right for them. Estate planning is not just about saving your family from estate taxes, or making sure Junior gets the house; it’s about leaving them peace of mind. A well thought-out will or trust saves them from a lengthy probate process, but also reassures your children that they are doing what mom or dad really would have wanted. And sometimes a well designed plan might include a personal statement of values and wishes for your spouse and children, a writing that is sometimes called a memorandum of intent. Indeed, such a personal statement can give you the opportunity to express certain things that you may not have been able to express during life. An estate plan is full of documents designed not just to save you or your heirs money, but to allow you to express your wishes and values even after your death. Estate Planning is about more than just money—it’s about family, legacy, and love.
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