Looking At The New Estate Tax Laws

A rundown of recent changes.

In 2011, families and their financial, tax and legal consultants can at last plan estates with a degree of certainty. Thanks to the Tax Relief Act of 2010, we now have the lowest estate tax rate in 80 years, with some new rules to be aware of, and some very interesting choices and options affecting estate planning.¹

The federal estate tax is now 35% with a $5 million individual exemption. This is true for 2011 and 2012 – after 2012, estate tax rates could change.²

The new $5 million exemption is portable. That is, executors have the option to transfer an unused $5 million individual estate tax exemption (upon the death of one spouse) to a surviving spouse. So with this new portability, a married couple could potentially transfer up to $10 million of assets without incurring federal estate tax.³

In 2011, estates may be taxed under the new rules or the 2010 rules. That’s right, an executor has a choice. The executor can elect to:

• Subject the estate to the 2011 federal rules (35% estate tax, $5 million estate exemption, stepped-up basis for appreciated assets per IRC rule 1014)
• Subject the estate to the 2010 federal rules (0% estate tax and the $1.3 million modified carryover basis for appreciated assets in the estate, which becomes $3 million for assets passing to a surviving spouse).^3,4,5

Estates worth more than $5 million will have to consider many factors to determine which choice will give them less of a tax burden.

The federal gift tax exemption is set at $5 million through 2012. This is a fantastic tax break. Wealthy taxpayers can now plan to transfer significantly greater amounts of wealth within their lifetimes without triggering gift tax. This $5 million exemption is individual and portable, meaning that couples could potentially gift up to $10 million to heirs.^2,5

The annual gift tax exclusion is again $13,000 in 2011, so one taxpayer may gift up to $13,000 each to an unlimited number of individuals this year with the lifetime exclusion of $5 million in mind. (Those gifts can include tuition and payments for medical care.)²

Charitable IRA donations are again permitted. This isn’t an estate tax law per se, but it factors into estate planning and it is certainly worth noting. Charitable IRA rollovers are back in 2011 (we don’t know yet if they will be around in 2012). There may be less financial incentive for families to make these rollovers given the much higher gift and estate tax exclusion this year, but others will act on their altruism.^6,7

The charitable IRA rollover allows an IRA owner age 70½ or older to gift up to a total of $100,000 in IRA assets to one or more qualified charities or non-profit organizations (a move that can count toward his or her annual RMD). It has to be a direct transfer – the gift must pass directly from an IRA sponsor to the charity. The IRA accountholder doesn’t get a tax deduction, but he or she can potentially bypass the income tax on the distribution.⁶

• Charitable IRA gifts made in January 2011 can count for 2010. The new law says that if you make a charitable IRA transfer in January 2011, you can elect to report the transfer on your 2010 federal return. Additionally, you are free to make another IRA charitable rollover of up to $100,000 at some other point in 2011 for the benefit of your 2011 federal return.⁷

The GST is back. The generation-skipping transfer tax was 0% in 2010, but it returns at 35% in 2011. The GST exemption is set at $5 million for 2011 and it will be inflation-indexed for 2012.^5,8

In light of these interesting developments, it might be time to review your estate planning strategy.

 

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of Statler Financial Services, Inc. This information should not be construed as investment, tax or legal advice. Statler Financial Services, Inc., is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Statler Financial Services, Inc. is registered as an investment adviser with the state of Florida. The presence of this Web site on the Internet shall in no direct or indirect way to be construed or interpreted to suggest Statler Financial Services, Inc. is soliciting to sell advisory services or offering to sell advisory services to residents of any other state other than the state of Florida.

Citations.
1 businessweek.com/investor/content/dec2010/pi20101223_554594.htm [12/23/10]
2 online.wsj.com/article/SB10001424052748703675904576063903166546250.html [1/8/11]
3 naepc.org/journal/issue07a.web [12/20/10]
3 naepc.org/journal/issue07a.web [12/20/10]
4 money.usnews.com/money/blogs/the-best-life/2010/12/29/2011-tax-outlook-for-seniors-.html [12/29/10]
5 blogs.forbes.com/hanisarji/2011/01/02/new-year-different-rules-2011-estate-tax-gift-tax-gst-tax-rules/ [1/2/11]
6 online.wsj.com/article/SB10001424052748703395904576025610771041244.html [12/18/10]
7 blogs.forbes.com/ashleaebeling/2011/01/06/taxwise-giving-from-your-ira-the-january-do-over/ [1/6/11]
8 blogs.forbes.com/hanisarji/2010/12/23/congress-gift-to-the-wealthy-a-gst-tax-holiday-in-2010-act-before-the-new-year/ [12/23/10]
9 montoyaregistry.com/Financial-Market.aspx?financial-market=the-balancing-act-weathering-the-burden-of-sudden-wealth&category=22 [1/11/11]

The 47% Controversy

Half of Americans aren’t paying federal income taxes. Is that right?

A provocative statistic. Last July, the nonpartisan Tax Policy Center (a joint venture of the Urban Institute and the Brookings Institution) estimated that 47% of Americans would not owe a penny to the IRS for tax year 2009.¹

The White House has projected the federal deficit at $1.6 trillion for 2010 – that’s about 10.6% of our GDP, a percentage unseen since the 1940s. So is it fair to the nation that so many Americans are legally avoiding federal income taxes?²

A major reason? Refundable tax credits. The Making Work Pay credit and other tax cuts accompanying the federal stimulus gave millions more of us a refund this time around. If these credits hadn’t appeared, the TPC says 38% of us still wouldn’t have owed federal income tax for 2009, thanks to assorted variables – astute tax planning, low taxable income, and other factors.¹

People who assume the rich are dodging taxes are misinformed. The TPC found that only about 1.5% of those with taxable incomes of $1 million or more owed no federal income tax for 2009. For those with taxable incomes from $500,000-$1,000,000, the estimate rises to just 2%.³

If you made between $75,000-100,000 in taxable income in 2009, you may have been in the lucky 9.2% who the TPC says didn’t owe anything to the IRS. In contrast, it figured that 61.8% of taxpayers who earned $20,000-30,000 last year and 47.5% of those with taxable incomes from $30,000-40,000 had no federal tax liability.³

Can you bring the deficit down without new or excessive taxes? Good question. At first glance, it may seem impossible. The Treasury, however, has a plan to do it, and it looks like this: cut war spending by $250 billion, save another $252 billion by letting tax cuts sunset for couples making more than $250,000 yearly, collect $331 billion in bank fees, and save $105 billion from a selective federal spending freeze. This could shrink the deficit to around 3% of GDP, which the Treasury feels is bearable.⁴

Of course, bipartisan politics might get in the way. Higher federal income taxes (and new kinds of taxes) seem to be looming in the future; as for legislators figuring out a way to spare us from them, that would seem a longshot.

These are the views of Peter Montoya Inc., not Statler Financial Services, Inc., and should not be construed as investment advice. Statler Financial Services, Inc. does not give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. http://www.montoyaregistry.com http://www.petermontoya.com

Citations.
1 taxpolicycenter.org/publications/url.cfm?ID=1001289 [7/2/09]
2 reuters.com/article/idUSTRE63C09I20100413 [4/12/10]
2 usatoday.com/news/opinion/editorials/2010-04-16-editorial16_ST_N.htm [4/16/10]
4 cnbc.com/id/36432254 [4/13/10]