A Christmas Present From Congress

Posted in February 2011 on 2/1/2011

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Although much of the media attention has focused on the extension of the Bush income tax cuts, Congress has given those subject to estate tax a generous Christmas present. For those dying in 2010, 2011 and 2012, the estate tax threshold has been raised to $5 million. For most people, that will both eliminate federal estate tax and allow a full step-up in the tax basis of the decedent's assets.

In 2011 and 2012 you will be able to make lifetime gifts of up to $5 million per person. That increase allows a couple to give away up to $10 million without paying taxes on their gifts. Even if you have previously maxed out your lifetime gifting ability, you can now make an additional $4 million of tax-free gifts. Those gifts can even be made to grandchildren and future generations without causing any generation skipping transfer tax. This presents an excellent opportunity to help manage your children's estate tax liability as well as your own.

Not surprisingly, this Congressional gift is not permanent. Instead, it is like a gift card with a two-year expiration date. Like its predecessor, the new law will "sunset" and will expire on January 1, 2013 unless Congress passes new legislation to extend it. After the last ten years of estate tax drama, it seems unlikely that Congress will agree on an extension with only two years to do so. Even if there is agreement, the extension may not be as taxpayer-friendly as the law now in effect. Therefore, those who are interested in making significant gifts should do so during the next two years.

While this increase in the federal estate tax threshold will save many families from paying estate tax, it will also rewrite many people's wills. It is common for wealthy people to divide their estates into two portions. One portion is equal to the federal estate tax threshold prevailing at the time of death. That portion passes to a trust with various family members as beneficiaries. The rest of the decedent's assets then pass to his or her surviving spouse, either outright or in trust. With a new estate tax threshold of $5 million, that formula will pass the first $5 million of a person's wealth to the trust, leaving far less to pass to the surviving spouse.

If you and your spouse are not comfortable with that result, you should review your will with your BrownWinick attorney. Similarly, if your will makes provision for a bequest to your grandchildren and makes that bequest equal to your generation skipping transfer tax exemption, the new law will pass more of your wealth to your grandchildren and leave less of your wealth for your children to share. Again, this suggests that you should review your current will and make sure you are comfortable with how your wealth will pass.

Before you dismiss this as a non-issue, remember that the $5 million federal estate tax threshold used to be only $600,000. If your will has not been updated in the last ten years, you may have a will that does more tax planning than you now need.

Unfortunately, death is still certain but taxes are not. While your BrownWinick attorney cannot tell you what the estate tax rules will be at the time of your death, he or she can explain what the current law means for you and your estate.