A New Roadmap for Estate Planning

If it’s true that nothing is certain but death and taxes, someone neglected to tell the U.S. government. Last year, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Among other things, this act will have a major, three-part impact on all “transfer taxes” (estate, gift, and generation-skipping taxes):

• The gift-tax exemption has jumped from $1 million to $5 million for individuals and from $2 million to $10 million for couples.
• The top tax rate for assets above the exemption has fallen from 55 percent to 35 percent.
• Married couples can take advantage of new portability rights. A surviving spouse can add the deceased spouse’s unused exemption amount to his or her own.

This means transfer taxes have been unified. The tax burden has been considerably lessened. You can shield a $5 million gift from federal gift and estate taxes. And you don’t need complicated wills in the era of portability, do you? Sounds like a bonanza!

Well…maybe.

The Clock Is Ticking

The new tax regime only applies to the years 2011 and 2012 (with options for 2010 estates). Congress must act before December 31, 2012 or the tax code will revert to the previous, higher rates. As the law is currently written, the exemption might fall to $1 million with a top tax rate of 55 percent. Additionally, portability is scheduled to disappear when this act does, as discussed below.

All About Portability

Portability seems simple at first. For example, if a husband dies with $4 million in assets, his wife can add his unused $1 million to her $5 million exemption. At her death she can exclude $6 million of her own assets.

But the dollar value of the estate in this example is just one factor. There are also the couple’s circumstances to consider. If they are in their 50s, the wife might easily outlive her husband by decades. Their estate will continue to appreciate, making portability an attractive option. But if they are in their 80s and their total estate is less than $5 million, portability might be unnecessary.

In addition, portability only applies to surviving spouses. Remarriage complicates the picture. And though the new law unifies transfer taxes, portability cannot be used with the generation-skipping tax exemption. So don’t simplify those wills just yet.

The States Step In, the Feds Claw Back

States impose their own estate taxes, with exemptions lower than the federal government’s. Sheltering your exemption or exemptions in an estate in 2011 or 2012 might lead to serious state tax consequences.

Finally, if Congress doesn’t grandfather in gifts made now, after 2013 the revised law might “claw back” gifts greater than whatever the next exemption will be.

Nothing Takes the Place of Thoughtful Planning

That’s the one thing we can be sure of under any tax regime. Here’s how I see things:

• Update your existing estate plan. You have more assets than you think: for example, your IRA, 401(k), pension and life insurance.
• Look at your specific assets. Consider which might be the best to gift and the best to retain, given your comfort level and what you can afford.
• No plan? Make one! If you die without a will in 2011 or 2012, and if you don’t hold your assets jointly with your spouse, your state’s intestacy laws will control the distribution of your assets. Portions of your assets might not transfer to your surviving spouse.
• Update your beneficiary designations in your life insurance and retirement plans. If you haven’t already done so, make contingency designations. Don’t rely on your employer to hold this information, keep a copy yourself. Companies can be bought and sold and records can go astray.

There’s no point in jumping just because the law has changed. Nor should you assume that you’re safe because your estate fits within the $5 million exemption. I’d be happy to talk to you about the best course of action under current tax laws for you and your family.