It has been a long and uncertain year for anybody interested in the future of the estate tax, filled with a few ups, a few downs, and a lot of speculation. But after the recent passage of the new bipartisan tax bill all of the confusion and speculation is finally at an end, and it’s very close to what we anticipated. The bill is good news for most taxpayers; the Wall Street Journal says there are “many winners, a few losers,” and according to the New York Times “Almost no one will have to worry about paying the estate tax under the tax legislation just approved by Congress.” That is except for those subject to Massachusetts estate taxes who do not make adjustments. For what to do to review Massachusetts estate plans please read on.
Here is a brief overview of what you can expect in 2011:
New Estate Tax Exemptions and Rates: The new bill sets the estate tax exemption at $5 million per individual ($10 million per married couple), with amounts over the exemption taxed at a 35% rate. This is opposed to the $3.5 million exemption and 45% rate some lawmakers were hoping for.
Tax Election Option for 2010 Estates: As mentioned in a previous post, this is one of the biggest parts of the new bill. There may have been no estate tax in 2010, but there was also no “step up in basis,” meaning that heirs selling inherited assets were taxed based on the original acquisition cost of the assets, not on their value as of the date of the taxpayer’s death, as is usually the case. This led to a higher tax paid on the assets if and when they were sold, in spite of the lack of estate tax. Tax election gives 2010 estates the choice of whether to use 2010 or 2011 tax rules—a happy option for 2010 heirs.
Estate, Gift, and Generation-Skipping Taxes: In recent years these three levies have had varying exemption levels, making gift giving and succession planning and challenging exercise at best. The unification of all three makes tax planning and giving gifts to grandchildren much easier than it used to be.
Individual Income and Payroll Taxes: The new bill wasn’t just about estate taxes; it also extends the Bush-era income tax rates; this is good news as it prevents a rise for nearly all taxpayers.
How Long Will It Last? We’re all glad that the waiting is over and we finally know what to expect, but the new law is only effective through 2012, at which point the provisions will “sunset.” (That is estates above $1 million will be taxed.) This new tax package sets our minds at ease now, but the estate tax issue is far from over. It looks as if we may have to revisit the issue in 2012-2013.
With the threat of high estate taxes out of the way does any reason remain to create (or update) your estate plan? Absolutely!
Estate planning is about more than just planning for taxes, it’s about taking control of your assets and choosing how your estate will be distributed. Divorce, second marriages, planning for college, charitable gifts—these are just a few of the reasons why estate planning is essential regardless of the state of the estate tax.
Massachusetts Residents however, remain subject to Massachusetts estate taxes on amounts above one million dollars. Regardless of the federal estate tax increased exemption for the next two years, Massachusetts will assess an estate tax on all estates above $1 million. However a married couple many times will only get one exempt amount to split, unless they take the necessary steps to ensure their estate plan is up to date and funded correctly so they will be eligible to receive the $2 million combined exemption, as there is NO PORTABILITY in Massachusetts.
Also, Massachusetts clients and taxpayers need to watch out for estate plans created based on maximum federal applicable exclusion planning, common for many estate plans prior to 2003. Now with the $5 million federal exempt amount, there could be a COMPLETELY AVOIDABLE Massachusetts estate tax triggered at the first death. The cost to your souse and family could be as much as $400,000 in unnecessary estate taxes.
WHAT TO DO…if you have an existing estate plan, have it reviewed by a qualified tax and estate planning attorney so you make sure you, your spouse and your family are protected from unnecessary taxes now and in the future. It may also be helpful for you to have an ongoing review process to make sure that future changes in the law, finances and family circumstances will be taken into consideration in your life and estate planning.
At the very least, the recent fluctuation of the law means that you’ll want to call our office and make an appointment to have your existing plan reviewed and updated to ensure you don’t have any outdated clauses that could negatively affect your heirs.If you do not have an estate plan or its been a while since it was reviewed by an experiences tax and estate planning attorney, consider attending an upcoming estate plan and asset protection workshop. For upcoming dates and to register click here or call 800-964-4295(24 hours) to register.