In 2001, President George W. Bush came to office with the promise of large tax cuts. One of his first acts as president was signing $1.35 trillion in cuts, phased in over the next ten years. Part of that legislation included a gradual reduction of the Federal Estate Tax to be followed by a one-year repeal in 2010. This law, however, also included a sunset provision where the tax cuts, together with the Estate Tax repeal, would expire in 2011.
After President Obama took office, there was some uncertainty about whether the tax cuts would be extended after the sunset at the end of 2010. As the expiration date approached, many wondered if lawmakers would allow the tax rates to return to 2001 levels, especially as the United States faced a soaring budget deficit.
This past December, President Obama and Congress agreed to a compromise to extend the Bush tax cuts for two years. The deal included some changes to the Federal Estate Tax law. Instead of reverting to 2001 levels, which provided for a $1 million Estate Tax Exemption and a tax of 55 percent on the amount above the exemption, the new law will provide for a $5 million Exemption and a 35 percent tax rate on the amount above the Exemption.
This provision was more generous than many experts predicted. Many observers expected the 2009 rates of a $3.5 million Exemption and a 45 percent tax rate to be reinstated. This new law, however, is set to expire again in two years, leaving the estate planning needs of many people uncertain. These changes impact both estate and gift tax planning, making proactive estate planning strategies essential to minimize tax liability and maximize tax benefits before exemption limits and exemption amounts potentially change due to future tax law changes or new tax legislation. The temporary nature of the current exemption, as established by the Tax Cuts and Jobs Act (TCJA) and other tax laws, highlights the importance of proactive planning to lock in current exemption amounts before they decrease.
Further complicating the issue is that beneficiaries of those dying in 2010 have two options to consider when paying estate taxes. Heirs can choose to follow the 2010 law, using an artificial step-up basis with no Estate Tax, or use the new 2011 tax provisions. Consulting a tax attorney or estate planning attorney is crucial to understand the estate tax consequences and income taxes associated with each option, as well as the impact on taxable gain and overall tax burden.
While the Estate Tax can have a significant impact on large estates, other provisions in the tax code can affect estates that have far fewer assets. Taxable estates, estates valued above exemption amounts, and significant assets may be subject to both federal estate taxes and inheritance taxes, depending on state law. The law is set for the next two years, but what will happen beyond that time is uncertain. It is important to not only discuss your current estate plan with an experienced estate planning attorney but to periodically revisit the plan, as laws and tax rates may change. Reviewing existing estate plans with tax professionals and financial advisors is essential to address potential tax law changes, gifting assets, lifetime gifting, and the use of irrevocable trusts, charitable giving, and other estate planning strategies to reduce estate tax liability and protect family members. Family limited partnerships, grantor retained annuity trusts, irrevocable grantor trusts, and charitable remainder trusts can play a key role in transferring assets, managing appreciated assets, and planning for future appreciation to reduce the taxable estate and overall tax burden. Married couples and one spouse can maximize the use of the lifetime exemption and annual exclusion gifts, and utilize spousal lifetime access trusts or irrevocable life insurance trusts to minimize estate tax liability. It is also important to consider the relevance of gift tax laws, gift tax exemption, federal gift tax, and gift and estate taxes, and to understand current law and exemption amounts for effective estate tax planning.
Comprehensive estate tax planning should include consideration of retirement accounts, life insurance policies, and the involvement of estate attorneys and financial advisors. When planning for multi-generational wealth transfer, be sure to consider inheritance tax, inheritance taxes, and GST taxes. Strategic planning and the use of appreciated assets can help minimize taxable gain and income taxes for heirs and beneficiaries. Adapting to tax legislation, potential tax law changes, and the evolving landscape of federal estate tax laws is critical to protect significant assets and family members.
Established in 1952 by Irwin S. Rubin, Rubin, Glickman, Steinberg & Gifford P.C. boasts over 65 years of experience serving clients throughout Pennsylvania. Renowned for its commitment to ethical representation, the firm has garnered prestigious accolades, including being named the “Best Law Firm” for its outstanding legal defense work by U.S. News & World Report. Their team of seasoned attorneys, recognized as Pennsylvania Super Lawyers and Rising Stars, brings unparalleled expertise to a wide range of legal matters, ensuring exceptional representation for individuals, families, businesses, and organizations.
