Newland's Business Notes

Estate Tax 2011    

Volume 15 Issue 1 -- January/February 2011

We have written before about the estate tax and how individuals were confounded by the confusion generated by the ever-changing nature of the law and what would happen in 2010 and thereafter. Now, after ten years, we finally have an answer, at least for the next two years!

In 2001, the law gradually increased the lifetime exemption from $1,000,000 in 2001 to $3,500,000 in 2009 and then eliminated the estate tax entirely for one year, 2010. In 2011, the estate tax was to revert to the law in 2001, with a $1,000,000 lifetime exemption and a maximum estate tax rate of 45%.

In late December 2010 Congress changed the law again, but only for the next two years. Among the changes was an increase in the lifetime estate tax exemption to $5 million per individual and a provision allowing easier use of the combined lifetime exemptions for married couples.

The new law means that with proper planning, a married couple with an estate of $10 million could generally avoid estate tax entirely on all $10 million of assets. In addition the new law established maximum estate and gift tax rates of 35%, which are 10% lower than the 2001 maximum rate of 45%.

What about the estate of the individual who died in 2010? The trade-off for having no estate tax in 2010 was the elimination of the step up in basis of assets to the value at the date of death. Instead, heirs of 2010 decedents had to use carryover basis, which we discussed in our January/February 2001 newsletter, "Basis of Death."

The recently enacted law, however, creates an additional choice. Rather than 2010 carryover basis and no estate tax, the estate of a person dying in 2010 now can elect to use both the old "stepped up basis" rule and the new estate tax rates and exemption amount.

The step-up in basis can be quite valuable because it allows the heirs of an estate to use as their basis for computing income tax gain the fair market value of the assets on the date the decedent passed on.

For the estate of a decedent who died in 2010 that is worth less than $5 million, the choice in most cases would seem to be a "no brainer" - the 2011 law should be used. For an estate larger than $5 million, it may be necessary to do some calculations to determine which choice produces lower overall tax.

The new law gives additional time to make these choices. Normally, the estate tax return needs to be filed 9 months after the date of death, but the period of time to elect to apply the 2010 law or the new 2011 law is 9 months after December 17, 2010.

Under the new law, the lifetime gift tax exemption is once again the same as the estate tax exemption. Stated differently, a gift tax would not be incurred until lifetime gifts exceeded amount permitted under the lifetime exemption, namely $5,000,000. If transfer during life exceed the lifetime limit then the maximum rate is 35% (same as the estate tax). In other words, the estate and gift tax are once again a combined or unified tax on wealth transfer during life (gift tax) or at death (estate tax).

Do the recent changes require any alterations in existing estate plans? Properly drafted revocable living trusts (RLTs) using a formula we call "reduce to zero" to allow the maximum marital deduction and the lifetime exemption, such as many RLTs drafted by Newland & Assoc., will not require revision and will be fully effective under the new law.

For example, the lifetime exclusion in 2009 was $3.5 million. This meant that a married couple using two RLTs and having marital assets of $7 million could in most cases avoid estate tax at the death of both spouses. Under the new law, the same effect can be reached and estate tax can be avoided on up to $10 million worth of assets.

This does not mean that all estate plans should not be reconsidered. For example, if a will or RLT assumed that a surviving spouse would receive significant assets under a marital deduction trust, that may no longer be an accurate assumption because of the increase in the lifetime exemption, which reduces the need for many couples to use the marital deduction. Family and marital changes should also trigger an estate plan review.

If you need assistance with either estate planning or handling an estate, please contact Newland & Associates, PLC.

Copyright 2011

Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.

While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.

Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.

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