Tax laws are confusing on a good day…
What you can deduct…
What you have to claim…
And with all the recent changes to the laws, it’s almost impossible to know if you’re doing the right thing.
We’re hoping this will help.
Here’s the straight scoop on how the new tax law affects your estate plan:
A Quick and Dirty List of What Changed
On December 16, 2010, Congress passed a new tax law that changes how your estate should be planned:
- The estate tax has been restored retroactively to Jan. 1, 2010.
- You can pass $5 million through your own estate without having to worry in 2011. That amount will be indexed for inflation after 2011. Anything over the $5 million mark is taxed at a maximum of 35 percent.
- If you die in 2011, your surviving spouse can add any of your unused exemption to theirs – a new concept of portability. In calculating the total exemption (up to $10 million), the amount that’s portable is not indexed for inflation, but your surviving spouse’s own exemption amount is.
- The gift tax still applies, but the amount you can give away in your lifetime has been raised from $1 million to $5 million starting this year. This amount will be indexed for inflation as well, and you and your spouse can combine your lifetime limits for a total of $10 million. If you plan to give away more than $5 million, the tax rate on the excess will remain at 35%.
- Generation-skipping transfer tax has been reinstated starting this year. This tax is applied on top of the estate or gift tax to any assets you pass on to your grandchildren or to a trust you establish for their benefit. The $5 million exemption applies to this tax as well. The excess will be taxed at 35%. Portability does not apply to the generation-skipping transfer tax.
Interesting note: When considering income tax on inherited assets, remember that the cost basis for the assets is adjusted to the fair-market value on the date the owner dies. This will help limit the capital-gains tax that your heirs have to pay if they sell the asset.
So, What Do You Do Now?
Keep in touch with your estate planning attorney (or hire one if you don’t already have one) and talk to him or her about the changes now and in the future (this law is only for two years).
When you start planning your estate, make sure you have your hands on records showing what your assets cost when they were purchased. If you can’t prove what the assets originally cost, the IRS is going to assume that the cost was zero and your heirs could be stuck paying capital gains tax on the total sales amount. For the sake of your heirs, keep all your purchase records in one place, preferably with your estate planning documents.
If you’ve been chosen to be the executor of someone else’s estate, document every conversation and always follow up verbal communication in writing. If the family disagrees with what you recommend, you may be better off doing what they want to do. Just make sure they sign documentation releasing you from liability and indemnifying you from any losses they take as a result.
If you have an estate plan or are thinking about planning your estate and would like an opinion on how to deal with the most recent changes to the estate tax laws, call us to schedule your Family Wealth Planning Session today. We can identify what needs to be done to ensure that you have the right plan in place to take full advantage of all the recent changes. Our Family Wealth Planning Session is normally $750, but this month I’ve made space for the next two people who mention this article to have a complete planning session with me at no charge. Call today and mention this article.