Federal Estate Taxes – A History Lesson and What Lies Ahead?
The Federal Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "Taxable Estate." These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.
Once the taxable estate is determined, you compare that to the exemption amount for the year of passing. This is where the uncertainty lies. We have been in a time of change and continued uncertainty.
The amount of the exemption amounts for federal estate taxes have changed over the years. As recent as 2008, the exemption amount was $2,000,000 per person. In 2009, the exemption amount was $3,500,000 per person. There was no estate tax in 2010. The law was scheduled to go back to $1,000,000 in 2011; however, Congress took action and changed that late 2011. In December 2011 Congress passed a bill that included changes in the federal estate tax exemption amounts.
For decedents dying in 2011 and 2012, the Act greatly reduces the reach of the estate tax by granting estates a $5.0 million exemption for property subject to the tax. In 2009, the last year in which there was an estate tax, the exemption was $3.5 million, so this is a significant increase. In addition, the Act introduces the concept of exemption “portability” between spouses. If one spouse does not use all of his or her $5.0 million exemption, it may be used by the estate for the surviving spouse, effectively creating a $10 million exemption for married couples. The few estates that exceed this $5.0/$10.0 million threshold will be subject to a new 35% tax rate, considerably lower than the 45% rate that prevailed before 2010.
Notice that the Act applies to 2011 and 2012. What happens after that depends ultimately on what Congress decides. If they do nothing, the estate tax exemption law is set to “sunset.” This means that the exemption amount will be $1,000,000 per person and no portability. The tax rate will be 55%. Ouch. Will this happen? Experts in the field of estate planning feel strongly that Congress will make changes prior to year end. We will wait and see.
The best thing for you to do is have the best defense available. Estate planning! I do not suggest doing anything drastic like gifting all of your assets. That opens a whole other issue. Instead, find an expert in estate planning and work through a plan that meets your needs.
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Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.