New Opportunities Under the New Estate Tax Law- Part II

Last week I began a discussion of the new estate tax law and how some of the provisions my affect you.

• Make Gifts During Your Lifetime. Last week I discussed that at death, you can leave up to $5 million in trust or outright to heirs free of estate taxes. You don’t have to wait until you die to make use of the new $5 million exemption. The new law allows you to apply that limit either during life or at death. It’s like rollover minutes for your cell phone…any of the unused $5 million gifts during your lifetime rollover at your death! This lifetime gift exemption is in addition to the annual gift tax exclusion of $13,000 per recipient. Planning point: If you are a small business owner who would like to make certain the business stays in the family, now may be an excellent time to gift some of your business ownership to children. You may get a double benefit due to timing the gift at the end of the recent Great Recession whereby business valuations are low. Then as the economy recovers the appreciation of the transferred business interests will accrue to the new owners which helps you reduce your future estate as well. And this is not just for business owners. If you have an estate that significantly exceeds the exemption amount, you may want to consider making tax free gifts to family members using assets that you believe will appreciate in value in the years ahead. This may be a disappearing opportunity since this $5 million tax free gift is set to expire. If congress takes no action, this limit will drop to $1 million on January 1, 2013.
• Heirs receive a new tax basis for transfers at death. This is not new but is a point worth making. For example, many times people will hold a stock in which they have a low tax basis so as to avoid paying capital gains taxes if sold. If they die still holding that stock and you inherit it, you receive what’s called a stepped-up tax basis, meaning you could immediately sell it and owe no taxes. Planning point: You face a trade off in deciding whether to make transfers during your lifetime (as in my point above) versus transfers at death. The recipient of a gift during your lifetime gets your same tax basis so that a future sale would be potentially subject to capital gains taxes.
• Lower transfer tax rates now. For gifts or death transfers in excess of the $5 million limit, the new tax rate is 35%. It is set to go to as high as 55% in 2013 if congress fails to take action otherwise. This tax rate applies to lifetime gifts or transfers at death in 2011 or 2012. Planning point: If you have a very large estate and would consider making gifts that exceed the $5 million lifetime gift limit, you’ll likely never have a chance to do so at a lower tax rate.

Whether you feel your estate is large enough to take advantage of any of these strategies, be clear that, at a minimum, you need at least a basic estate plan which would include a will, durable power of attorney and advanced healthcare directive.