New Year: New Estate and Gift Tax Law

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The New Year has traditionally been a time when many people review their financial and estate planning.  2011 should be no exception, and in fact, proper review and planning is particularly important this year given the recent changes to the federal estate and gift tax laws.

On December 17, 2010, Congress enacted a new statute to settle uncertainties that have plagued estate planning in recent years.  While the new statute provides welcome relief for taxpayers in the form of an increased estate tax exemption amount and lower tax rates, the changes only apply through the end of 2012.  In 2013, unless Congress acts otherwise in the meantime, we return to 2001 law with less favorable tax thresholds and rates.  What follows is a summary of the new estate and gift tax laws and how they may affect your estate planning.

2010 Estates
What Changed Retroactively?
Retroactive changes in the tax laws usually spell trouble for tax payers – not in this case.  Decedents who died in 2010 are now subject to either (1) an estate tax with a $5,000,000 exemption level (and a full step-up in basis); or (2) no estate tax (with a modified carryover basis – no step-up in basis beyond the first $1,300,000 plus an additional $3,000,000 of stepped-up basis for transfers to surviving spouses) – at the election of the personal representative of the decedent’s estate.  If you are in a situation where you are administering the estate of someone who passed away in 2010, you should consult with an experienced attorney or other tax adviser to determine how best to proceed under these new
tax rules.

Estate & Gift Tax in 2011 & 2012
The federal estate tax exemption level has now been set at $5,000,000 per person, which means that an individual dying in 2011 or 2012 can pass on $5,000,000 to the next generation without estate tax.  Moreover, a couple can collectively pass on $10,000,000 to the next generation without estate tax.  The maximum tax rate has been reduced from 55 percent to 35 percent for estates in excess of the new exemption amounts, and assets will receive a full step-up in basis for income tax purposes.  A completely new feature of the tax statute is the concept of “portability,” which permits an individual’s unused exemption amount to be transferred to his or her surviving spouse without the need for traditional tax planning trusts.  For portability to apply, an estate tax return exercising the portability election must be filed on the first spouse’s death.  While portability, an increase in exemption levels, and a decrease in tax rates are all taxpayer friendly changes, they are only effective, at present, for decedents dying in 2011 and 2012. 

The Oregon Inheritance Tax continues, with a $1,000,000 exemption per person threshold.  Proper tax planning should take into account not only the federal estate tax but also the state inheritance tax.

The federal gift tax continues in 2011 and 2012.  Somewhat surprisingly, however, the lifetime gift tax exemption has been raised from $1,000,000 to $5,000,000, which means that an individual can gift up to $5,000,000 during his or her lifetime without having to pay gift tax.  The amount gifted during life is treated as an offset against the amount that can be transferred at death free of estate tax.

The annual exclusion amount remains at $13,000 per donee per year and gifts in excess of the annual exclusion must still be reported on a gift tax return.

2013 and Beyond
If no new legislation is enacted before January 1, 2013, we will return to 2001 law, which means that the estate and gift tax exemptions will be $1,000,000 and the top gift and estate tax rates will increase to 55 percent. 

With exemption amounts and tax rates scheduled to change and given the constantly shifting political winds, it is more important than ever to ensure your estate plan contains maximum flexibility.  You need to keep your tax planning options open without locking yourself or your surviving spouse into provisions that later prove unnecessary or unduly burdensome due to changes in the law.  Married couples with existing tax planning wills and trusts that include formula clauses dividing their estates between marital and family trusts should review their plans to make sure that there are not unintended consequences of the tax law changes, particularly if there are different beneficiaries for the marital and family trusts.  Revocable living trust funding, asset division between spouses, and beneficiary designations on retirement accounts should be reviewed, particularly where the initial division, funding, or designation was predicated on exemption levels that no longer apply.  Finally, sizeable estates will want to seriously consider making gifts directly or in trust over the next two years to take advantage of the now very powerful gifting opportunities.

Keep in mind that while these recent tax law changes may have grabbed our attention, in reality, there are many non-tax reasons to regularly review your estate plan to make sure that it is up to date.  Changes in family status, financial condition or health for you, your beneficiaries or your named fiduciaries may be reasons to update your plan regardless of the tax laws. 

Erin MacDonald and Brent Kinkade are both Partners of Karnopp Petersen LLP. Karnopp Petersen LLP is located at 1201 NW Wall Street, Suite 200, Bend.  www.karnopp.com or 541-382-3011.

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