Morbid as it sounds, the best estate planning advice you might receive now is to die before the end of the year.
Alert: The federal estate tax law remains in flux. But with Congress seemingly unable to resolve the matter anytime soon, the current law repealing the estate tax for 2010 remains in effect. Therefore, if someone dies this year, his or her family will likely owe zero federal estate tax—no matter how many millions the person bequeaths. Classic example: It has been estimated that the heirs of George Steinbrenner, who died July 13, will save $500 million in estate tax.
What’s more, the estate tax is scheduled to come roaring back in 2011, with a reduced exemption amount and a higher top tax rate. It’s enough to give wealthy individuals some pause.
Of course, we’re being facetious. But you should examine how the estate tax law has arrived at this point and what you can do going forward.
Here’s the whole story: The “death and revival” of the federal estate tax can be traced back to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Prior to 2001, the estate-tax exemption could only shelter up to $675,000 of assets left to beneficiaries other than a surviving spouse. Under EGTRRA, the exemption gradually increased until it topped out at $3.5 million in 2009. At the same time, the top estate tax rate declined from 55% to 45%.
EGTRRA provided comparable changes for the generation-skipping tax (GST) affecting most transfers to grandchildren. It also locked in a $1 million lifetime gift-tax exemption without any increases.
Finally, the rules allowing a step-up in basis on inherited assets were revised by EGTRRA, beginning in 2010. Heirs must now “carry over” a decedent’s basis in the property. But there are two key exceptions to the carryover basis rules:
- The basis for qualified assets transferred to nonspouse beneficiaries may be increased by $1.3 million.
- The basis for qualified assets transferred to a spouse may be increased by $3 million.
Most tax prognosticators predicted the estate tax repeal and accompanying changes would never happen. Yet Congress could not agree on an alternative before Jan. 1, 2010. What’s more, no other clear-cut resolution is in sight (see box below).
5 ‘no-harm’ tax moves
If you’ve been left in a quandary about estate planning, you’re certainly not alone. Nevertheless, you could make several logical moves in 2010.
1. Maximize the annual gift-tax exclusion. Under the exclusion, you can give any nonspouse relative cash or other property valued at up to $13,000 this year without any gift-tax consequences ($26,000 for joint gifts by a married couple). The gifts are removed from your taxable estate so you’ll have no future worries about these assets.
2. Give away high-basis property. Due to the change to the carryover basis rules, younger family members may be socked with a big income tax bill when they subsequently sell inherited assets.
Therefore, if you’re deciding on which property to give children or grandchildren, opt for high-basis property that will result in low income tax. Preserve low-basis property for your estate.
3. Set up a trust for the grandkids. As with the federal estate tax, the GST is repealed for 2010, before it is scheduled to return in 2011 with just a $1 million exemption. Therefore, you might create a trust to benefit grandchildren this year, especially if you intend to pass assets to them anyway. Even if the GST is revived, you’re no worse off than you would have been.
4. Avoid large “deathbed” gifts. This is the opposite advice that severely ill individuals received last year. If you were to die in 2010, no estate tax would be owed under current law. But large gifts above the $1 million exemption could trigger a sizable gift tax.
5. Review the terms of documents. For instance, if a credit shelter trust utilizes a maximum exemption clause, the trust document may have to be revised due to the reduction of the exemption to $1 million in 2011. Similarly, you should examine any power of attorney and health care proxies you’ve created to ensure that your intentions will be met under the changing law.
Tip: Tweak your estate plan. Go over each item with an estate planning pro.
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