Now Is The Time to Update Your Estate Plan

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Now Is The Time to Update Your Estate Plan

The estates of wealthy individuals who died in 2010 were not expected to pay any federal estate tax, but, as you probably know, that situation changed. When President Obama signed the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” (“TRUIRJCA”, or “2010 Tax Relief Act”) the federal estate tax sprung back to life. From now until December 31, 2012, the IRS will collect a 35% tax on all estates worth more than $5 million. This M&Q newsletter provides a brief overview of this new law, and more importantly, what you should do about it.

Background

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the first of the two large legislative packages that contain most of what are now commonly referred to as the “Bush tax cuts.” EGTRRA gradually lowered the maximum estate tax rate and substantially raised the estate exemption amount until 2010, when the federal estate tax was eliminated – for only one year.

The repeal of the estate tax led to several well-publicized instances in which famous people died in 2010 leaving multibillion-dollar estates (e.g. George Steinbrenner) that would have passed to their heirs without paying so much as a penny in federal estate tax. (Interestingly, those heirs may still avoid estate taxes based on some provisions of TRUIRJCA.) When the estate tax disappeared, a new capital gains tax regime appeared, but again only for 2010. This state of mass confusion and uncertainty apparently prompted the 2010 lame duck Congress to quickly pass the 2010 Tax Relief Act.

New law

The new law brings back the estate tax, at least until the end of 2012. It also provides some interesting new provisions that provide estate planning opportunities.

For 2010, the estate tax exemption amount is $5 million and the top rate is 35%. During 2011 and 2012, the top rate will be 35%. For 2011, the exemption amount will be $5 million per individual (indexed for inflation after 2011).

For people who died in 2010, their executors can choose tax rules to apply – the law as it existed in 2010 under the old law, or the new provisions imposed under TRUIRJCA. That's important because executors will have to pay close attention to determine whether it’s better for heirs to pay higher capital gains tax later when property is resold, or whether it’s better to subject the estate to the estate tax rules and save capital gains taxes later. For families who have owned small businesses, family farms, or have otherwise held investments for a long time, this might be a pretty difficult decision.

Starting in January 2011, the gift tax was reunified with the estate tax. This means that the $5 million estate tax exemption will also be available for gifts made during life. This means that families have much more powerful gifting options available to them than in previous years. As a result, many families will help to provide for their children, grandchildren, or other loved ones during their lives – so they can witness the joy first-hand – rather than have to wait until their death to make gifts.

One of the other major features of TRUIRJCA is the new concept of “exemption portability.” This feature allows married couples to actually share their estate tax exemptions, making it easier for them to shelter up to $10 million from taxes. There are some important nuances to portability that we have to plan for, but this feature adds a lot of planning flexibility for married couples.

How You Are Affected?

This law impacts our clients in several ways. First, we need to first make sure that our clients’ property will be divided according to their desires, and not dictated by Congress or by state law. For more than 50 years it has been common to use a written mathematical formula to divide the assets of a married couple when the first spouse dies to maximize estate tax savings. Likewise formulas have been used to provide funds for charitable causes and to benefit family and friends. With such increased exemptions impacting “formula clauses” in wills and revocable trusts, it is probably in your best interest to review your estate plan to be certain the plan will work as you intend.

Frankly, most estate plans should be reviewed every few years to make sure that the plan is not only consistent with the state of current law, but to also make sure that it reflects the family’s needs and circumstances. The new tax law provides a perfect reason for you to sit down and review your goals and make sure the important pieces of your plan still fit.

What Should You Do?

Please call our office as soon as possible to schedule time to review any existing estate plan you may have, or to set up an appropriate plan. We can then make some recommendations for you to consider and will discuss any changes that we believe are necessary. The tax landscape changes fairly frequently, and it has changed dramatically over the past decade. Estate plans should be as flexible as possible to make sure that your wishes are fulfilled from 2011 and beyond. Plans should be revisited periodically to make necessary adjustments, not only for the occasional law changes, but the often more common changed life circumstances.

Is This All About Taxes?

Estate planning has much less to do with taxes and much more to do with making sure your wishes are known and honored. Families change, needs and interests change, and sometimes your plan should change accordingly. The changing tax landscape acts as a reminder that you should revisit your estate plan regularly.

Please contact us as soon as possible to schedule an appointment.