By Randy Neumann
Well, as I live and breathe. Congress finally got around to addressing the estate tax situation; well, at least for two years.
Let’s begin with a little history. In 2000, the Republicans tried to repeal the estate tax or what they called the “death tax.” They couldn’t get the 60 votes necessary in the Senate, so they compromised by creating the Economic Growth Tax Relief Reconciliation Act of 2001 which put the estate tax on a roller coaster ride that lasted 10 years.
For those who think that 10 years is an “eternity,” consider this: The first estate tax emerged from the Stamp Act in 1797, which required that federal tax stamps be purchased when transferring property from an estate. The cost of the stamp required to transfer property depended on the value of the estate and the size of the transfer.
Interestingly, this tax was enacted because of the strained trade relations with France that compelled the United States to develop a powerful navy. It was repealed in 1802.
Returning to more modern times (1997): For many years, the exemption from the estate tax was $600,000 and the rate of taxation was 55%. The above-mentioned tax law gradually increased the exemption amount to $3.5 million in 2009 with a tax rate of 45%.
Amazingly, the law eliminated the estate tax in 2010. Nobody in their right mind believed that Congress would let that happen. All the pundits, including this one, predicted that Congress would pass legislation to bring back the estate tax. We were wrong. Therefore, 2010 turned out to be a great year to die for billionaires or, more accurately, their families.
George Steinbrenner’s passing got a lot of ink because of his notoriety. It is estimated that his estate saved $500 million in estate taxes. However, he’s a piker compared with Texas oilman Dan L. Duncan, who died in March 2010. According to Forbes magazine, Duncan’s estimated net worth was $9 billion, so the 55% that would have gone to the government went to his family instead.
Why didn’t Congress reenact the estate tax law in 2010?
Well, I guess you can say that they were busy with things like economic stimulus, health care reform, cash for clunkers, credit card regulation, digital TV, unemployment benefits, et al.
For 2011, Congress finally got around to re-addressing the estate tax in the Tax Relief Act of 2010, and here’s what it looks like.
The federal estate tax rate is now 35% with a $5 million individual exemption. While this is true for 2011 and 2012, after 2012, estate tax rates could change. As Jack Paar would say, “I kid you not.”
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. Therefore, with this new portability, a married couple could potentially transfer up to $10 million of assets without incurring federal estate tax.
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 a gift tax. This $5 million exemption is individual and portable, meaning that couples could potentially gift up to $10 million to heirs.
The annual gift tax exclusion is again $13,000 in 2011, so a 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.)
The charitable IRA rollover allows an IRA owner age 70 or older to gift a total of $100,000 in IRA assets to one or more qualified charities or nonprofit 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.
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.
The GST is back. The generation-skipping transfer tax was 0% in 2010; however,
it returns at 35% in 2011. The GST exemption is set at $5 million for 2011, and it will be inflation-indexed for 2012.
In light of these interesting developments, this is a good time to consult with your financial planning professionals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann CFP® is a registered representative with securities and insurance offered
through LPL Financial. Member FINRA/SIPC. He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.
