Congress has passed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 ,and on December 17, President Obama signed it into law. Among the many things the new law does is give us temporary certainty as to the status of the federal estate and gift taxes. Here’s a brief rundown:
- As for the estate tax, the maximum rate is 35%, and there’s a $5 million individual exemption.
- Any exemption that is unused by the estate of one deceased spouse may be used by the remaining spouse’s estate. So, the second spouse to die can receive up to a $10 million exemption.
- These amounts are applicable for 2011 and 2012.
- For 2011 and 2012, the normal step-up in basis is back in effect for inherited property. This means that for purposes of capital gains tax, when an heir inherits property, his or her basis in that property is the value of that property at the time of the decedent’s death.
- For 2010, executors have a choice: either apply the new estate tax regime, or apply the 2010 estate tax regime. Under the 2010 estate tax regime, there’s no estate tax, but the trade-off is increased capital gains liability for heirs and beneficiaries.
- What about gift taxes? For 2011 and 2012, the lifetime gift tax exemption is set at $5 million. For gifts above that amount, the maximum tax rate is 35%.
It’s estimated that about 3,600 families will have to pay estate taxes over the next two years. If you’re not one of these few, does it mean you’re off the hook as far as planning is concerned? Of course not.
Regardless of your net worth, estate planning is important to ensure that your assets are distributed as you want them to be, that your family is adequately protected, and that your needs are met in the event of disability.
Not to mention the fact that, two short years from now, we’ll likely be back in estate tax limbo. So, if your net worth is $1 million or more – including life insurance, real estate, and retirement plans – it’s wise to talk to your estate planning attorney and develop a plan that’s flexible enough to anticipate the next Congressional move, whatever that might be.