IMPORTANT ESTATE & GIFT TAX LAW CHANGES FOR 2011
Effective January 1, 2011, the federal estate tax is reinstated, but instead of only $1 million in assets being exempt from taxes, $5 million can pass tax-free. The lifetime gift tax exemption was also increased to $5 million and the tax rate for both the estate and gift tax is only 35%, compared to the 55% rate which would have been reinstated if Congress had not acted prior to December 31st. Unfortunately, the new legislation will only be in effect for 2011 and 2012, unless extended.
Another piece of good news is that with the return of the estate tax also comes return of the step-up in cost basis which estates were entitled to prior to the estate tax repeal for 2010. The effect of this is that capital gain imposed on estate assets will be avoided in most cases. Lastly, the new legislation allows surviving spouses, who make a timely election to do so, to take advantage of any unused portion of the estate tax exemption which the first-to-die spouse had. In summary, this means that a married couple potentially has an exemption amount of $10 million which they can use without the need to create a by-pass trust or credit shelter trust as part of their estate planning.
Before one celebrates all of the good news, however, one must remember that a number of states, including New York, impose their own form of estate tax. In New York the exemption amount for estates is only $1 million and, under existing law, can not be shared by a married couple; therefore, a by-pass trust or credit shelter trust or similar estate planning tool is still necessary. Anyone with assets over $1 million who resides in New York still needs to do some comprehensive estate planning in order to avoid unnecessary tax.
Even if it were not for the New York state estate tax, there are many advantages to married couples establishing trusts under their wills, for the benefit of the surviving spouse. Such trusts are extremely useful in protecting assets from creditors and for protecting assets from being dissipated because of long-term health care costs. Such trusts can also provide protection of assets in the event the surviving spouse remarries or becomes incapacitated and is not able to make wise financial decisions.
What should one do in this time of change and uncertainty? One should continue to move forward and take the steps necessary to develop a comprehensive estate plan, designed to minimize taxes and otherwise protect assets.
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IRS Circular 230 disclosure: We inform you that any tax advice contained in this communication is not intended or written to be used, and may not be used by your or anyone else for the purpose of avoiding penalties imposed under the Internal Revenue Code.