For those Americans who have been able to build some wealth throughout their lifetimes, estate planning has a lot to do with addressing the reality of the estate tax. Many people would suggest that there should be no estate tax at all. Their most convincing argument is that any assets that are left over after you have passed away represent a remainder that you managed to hang on to after paying any number of taxes throughout your life. And the more successful you have been, the more you have been taxed.
Love it or loathe it, however, we will likely always have an estate tax. For the past 10 years, one problem with the tax is uncertainty. If the estate tax was somewhat uniform and adjusted according to market conditions it could be planned for intelligently, but who must pay it and how much must be paid has been all over the place in recent years. In 2008 the exclusion amount was $2 million; in 2009 it was $3.5 million; in 2010 the estate tax was repealed; and in 2011 the estate tax exclusion was scheduled to be just $1 million. In addition to the reduced exclusion, the rate of the tax was scheduled to rise to as much as 55% in 2011 unless there was some 11th hour legislation to alter the law.
Lo and behold, that legislation has in fact been passed and the estate tax burden will be significantly lessened going forward. The bill that is going to extend the Bush era tax cuts and provide all Americans with continued tax savings also contains an estate tax provision. In light of the enactment of this legislation the estate tax exclusion will now be $5 million, and the top rate of taxation has been reduced to 35%.
Once again, however, these changes are only temporary and are scheduled to sunset in two years. What happens on January 1, 2013? You guessed it - back to a $1 million exemption and 55% tax. Uncertainty is still the order of the day.
These changes will impact many estate plans, so you may want to pay your estate planning attorney a visit to discuss how this legislation affects your existing strategy.
Due to provisions contained the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax was repealed for 2010. However, the estate tax is scheduled to return to its pre-2001 existence on January 1, 2011. For this reason it really has not had much impact on long term estate planning unless you were somehow certain that you were going to pass away in 2010.
The thing about the return of the estate tax in 2011 that is quite relevant is the fact that the exclusion amount will return to $1 million. It was $3.5 million when we last had to contend with the levy in 2009, so many estates that were previously protected are now going to be vulnerable to the estate tax. If you are in this position, or if the value of your estate has always exceeded the exclusion amount, a useful strategy that can be implemented to gain tax efficiency is that of gift giving.
The idea is that if you give gifts to your heirs while you are still alive you reduce the value of your estate to the point where it comes in under the $1 million exclusion amount. Of course, there is a gift tax to discourage this, but there are significant exemptions. The lifetime gift tax exclusion is $1 million, so you can give gifts at any time and in any increments throughout your life free of the gift tax as long as the value of these gifts does not exceed $1 million.
However, in addition to this lifetime exclusion, each taxpayer is entitled to give as much as $13,000 annually to an unlimited number of recipients, and these gifts don't count against your lifetime gift tax exclusion. You may also make unlimited educational and medical gifts, paying the tuition or medical expenses of as many people as you would like to equaling any sum of money free of the gift tax.
Contact our office today to schedule a complimentary consultation on how tax free gifts may reduce your estate's exposure to future estate taxes.
