This Sunday New York Times article talks about the new estate tax law. It hits the typical highligthts - $5 million estate tax exemption, portability for (opposite sex) married couples. One topic of interest is gifting. The new tax law increases the lifetime gift tax exemption to $5 million, matching the estate tax exemption. The problem is one of timing, though. This law is set to expire at the end of 2012, with the 2001 law coming back into effect if Congress doesn't act. This means - and stop me if you've heard this before - the estate tax gift tax exemptions will go back to $1 million.
If you are one of those who are able and inclined to give away $5 million in the next two years, you could concievably be in a bind if the gift tax exemption goes back to $1 million. In this case, you may have to pay gift tax on $4million. Several things have to happen for this nightmare scenario to play out, though. First, you have to give away $5 million dollars by December 31, 2012. Second, Congress must let the law lapse and the gift tax exemption return to $1 million. Third, you have to die after 2012 while the the exemption is less than $5 million. Fourth, do you really need me to go to fourth?
As you might have thought by now, and as I've posted before, the universe of people this applies to is exceedingly small. Most people don't have $5 million to give away. Most people who do have $5 million don't want to give it away. Most people who do have $5 and want to give it away probably won't do it in the next two years.
Making sure you don't inadvertently expose your estate planning client to unnecessary taxes is important, but it is not the only thing we do as estate planners. Keeping a perspective on all this, and planning for your client in the real world, is just as important.
Showing posts with label taxes. Show all posts
Showing posts with label taxes. Show all posts
Monday, February 14, 2011
Friday, January 14, 2011
Finally! Clarity in the Estate Tax! Sort of.
First of all, Happy New Year to everyone. We have 351 days left to make this year a success.
Now to the immediate matter at hand. As you may have heard, Congress has finally acted on the estate tax, passing a bill that levies a tax on estates greater than $5 million at a maximum 35 percent rate. That means that if your estate is worth less than $5 million, and almost everyone's is, you don't have to worry about this tax. At least for the next two years. Yes, rather than passing a permanent tax bill, the government instead passed a temporary bill that expires in 2012, at which time, the pre-2001 law ($1 million exemption [adjusted for inflation from 2001], maximum 55 percent rate) comes back into effect unless Congress does something. Again.
Now, why would our government pass a tax bill that was set to expire in 2012? I can't think of anything in particular that's happening in 2012. Please email me with your ideas.
Anyway, one aspect of this temporary bill is a thing called "portability." In short, in every married couple, each spouse has a separate estate tax exemption. Under portability, the surviving spouse can apply the unused portion of the deceased spouse's exemption to his or her estate when he or she dies. Unless the law changes. Or the surviving spouse gets remarried. Maybe.
To illustrate, let's say Spouse One and Spouse Two have a total estate of $3 million, all community property. Spouse One dies with an estate worth $1.5 million. The remaining $3.5 million can be used by the surviving spouse when he or she dies, for a total exemption of $8.5 million. One catch is, the surviving spouse has to die while there is still a portability law on the books. So, if this law expires after 2012, the surviving spouse loses the additional $3.5 million exemption. Another catch is if the surviving spouse remarries and then outlives his or her second spouse. This apparently immortal surviving spouse can now only use the portability of the second deceased spouse. So, if the second deceased spouse dies with an estate worth $5 million, the hearty surviving spouse gets no additional exemption.
We should all have these problems. There are many esoteric arguments being made about how best to address the potential traps in portability. One such "trap," using the example above, anticipates the surviving spouse wins the lottery, makes lifetime gifts of $8.5 million assuming they can be made tax free, and then the law expires, or he or she gets remarried and loses the portability. Most people don't make $8.5 million in lifetime gifts, even if they have the money, so this is a planning argument that most likely will occur only in a vacuum. Or a CLE presentation.
The bottom line is, most estates will not be taxable with a $5 million exemption amount. Or even a $1 million exemption amount. Most people don't win the lottery. So, portability won't mean anything to most people. As estate planners, the best we can do is understand the issues and plan for them as they come up. Your typical client with an $800,000 estate is likely not going to need to plan with portability in mind, and will not be affected if the $1 million exemption (adjusted for inflation from 2001) comes back in 2013.
So read the new tax law, understand it, and move on. There are more immediate issues that most estates must deal with. Like family dynamic.
Now to the immediate matter at hand. As you may have heard, Congress has finally acted on the estate tax, passing a bill that levies a tax on estates greater than $5 million at a maximum 35 percent rate. That means that if your estate is worth less than $5 million, and almost everyone's is, you don't have to worry about this tax. At least for the next two years. Yes, rather than passing a permanent tax bill, the government instead passed a temporary bill that expires in 2012, at which time, the pre-2001 law ($1 million exemption [adjusted for inflation from 2001], maximum 55 percent rate) comes back into effect unless Congress does something. Again.
Now, why would our government pass a tax bill that was set to expire in 2012? I can't think of anything in particular that's happening in 2012. Please email me with your ideas.
Anyway, one aspect of this temporary bill is a thing called "portability." In short, in every married couple, each spouse has a separate estate tax exemption. Under portability, the surviving spouse can apply the unused portion of the deceased spouse's exemption to his or her estate when he or she dies. Unless the law changes. Or the surviving spouse gets remarried. Maybe.
To illustrate, let's say Spouse One and Spouse Two have a total estate of $3 million, all community property. Spouse One dies with an estate worth $1.5 million. The remaining $3.5 million can be used by the surviving spouse when he or she dies, for a total exemption of $8.5 million. One catch is, the surviving spouse has to die while there is still a portability law on the books. So, if this law expires after 2012, the surviving spouse loses the additional $3.5 million exemption. Another catch is if the surviving spouse remarries and then outlives his or her second spouse. This apparently immortal surviving spouse can now only use the portability of the second deceased spouse. So, if the second deceased spouse dies with an estate worth $5 million, the hearty surviving spouse gets no additional exemption.
We should all have these problems. There are many esoteric arguments being made about how best to address the potential traps in portability. One such "trap," using the example above, anticipates the surviving spouse wins the lottery, makes lifetime gifts of $8.5 million assuming they can be made tax free, and then the law expires, or he or she gets remarried and loses the portability. Most people don't make $8.5 million in lifetime gifts, even if they have the money, so this is a planning argument that most likely will occur only in a vacuum. Or a CLE presentation.
The bottom line is, most estates will not be taxable with a $5 million exemption amount. Or even a $1 million exemption amount. Most people don't win the lottery. So, portability won't mean anything to most people. As estate planners, the best we can do is understand the issues and plan for them as they come up. Your typical client with an $800,000 estate is likely not going to need to plan with portability in mind, and will not be affected if the $1 million exemption (adjusted for inflation from 2001) comes back in 2013.
So read the new tax law, understand it, and move on. There are more immediate issues that most estates must deal with. Like family dynamic.
Wednesday, April 28, 2010
GRATs on Congress' Hit List
An article on Trusts and Estates magazine's website today refers to a provision in the March 24, 2010 Small Business and Infrastructure Tax Act that puts the hit on GRATS. The law will require that GRATs have a minimum 10 year term, that annuity payments not decline during the first 10 years of the trust, and that a GRAT’s design at inception envisions a remainder (which would basically eliminate the zeroed-out GRAT). The Senate has taken up the bill and T&E believes the Senate will vote on it by Memorial Day. The CBO estimate that this change will generate $4 billion over the next 10 years.
Even though most people aren't rich enough to need GRATS (I say that with the caveat that the future of the federal estate tax is, apparently, unknowable), the proposed changes seem to show a Congress more willing to look at the estates of the wealthy as a source of tax revenue. Expect to see more of this in the future. That means you, $1 million estate tax exemption and 55 percent rate! Get comfortable, you may be staying a while.
Even though most people aren't rich enough to need GRATS (I say that with the caveat that the future of the federal estate tax is, apparently, unknowable), the proposed changes seem to show a Congress more willing to look at the estates of the wealthy as a source of tax revenue. Expect to see more of this in the future. That means you, $1 million estate tax exemption and 55 percent rate! Get comfortable, you may be staying a while.
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