Importance of Properly Drafted and Executed Will
By George M. Riter, Esquire
If you do not have a Will at the time of your death, each state has established statutes known as intestate succession laws which will dictate how the property that you own will pass and to whom.
If you have not reviewed your estate planning documents and the manner in which your assets are held or titled and the beneficiary designations relating to certain other assets in the last few years, please feel free to contact:
James Jacquette
John J. McAneney
Michael O'Hara Peale, Jr.
George M. Riter
Sole Proprietorship Basics
If you're going into business on your own, the simplest legal structure is the sole proprietorship.
ESTATE AND GIFT TAXES IN 2011 AND 2012
For decedents dying in 2011 and 2012, the Act greatly reduces the reach of the estate tax by granting each estate a $5.0 million exemption for property subject to the tax. In 2009, the last year in which there was an estate tax, the exemption was only $3.5 million, so this change represents a significant increase. In addition, the Act introduces the concept of exemption “portability” between spouses - if one spouse does not use all of his or her $5.0 million exemption, it may be used by the estate of the surviving spouse, effectively creating a $10.0 million exemption for married couples. The few estates that exceed this $5.0/$10.0 million threshold will be subject to a new 35% tax rate, considerably lower than the 45% rate that prevailed before 2010.
Gift taxes are also lower. Since 2001, taxpayers have had only a $1.0 million lifetime exemption for gift tax purposes. That exemption is increased to $5.0 million for gifts made in 2011 and 2012, and the tax rate on 2011 and 2012 gifts in excess of that amount is 35%.
GENERATION-SKIPPING TRANSFER TAX
The Act makes a number of changes to the generation-skipping transfer (GST) tax, which, to simplify things a bit, is an additional tax imposed on gifts and bequests to grandchildren and great-grandchildren whether outright or in trust. The 2001 legislation repealed the GST tax for 2010 only, but there was a lack of clarity as to the effect of that repeal. The recent Act should eliminate that uncertainty because it provides that the GST tax was in effect in 2010, but with a 0% tax rate. This means that any generation-skipping transfers that occurred in 2010 were tax-free, but that taxpayers could still take advantage of the various GST tax exemptions that could reduce or eliminate the tax in future years.
Going forward, the Act aligns the GST tax with the reformed estate and gift taxes. In 2011 and 2012, the GST exemption is increased to $5.0 million and the tax rate is 35%. In 2013, the GST tax, like the estate and gift taxes, will revert to a $1.0 million exemption and a 55% tax rate.
PLANNING OPPORTUNITIES
Estates of decedents who died in 2010 now have certainty as to the tax law, but still must decide whether to accept the new default regime ($5.0 million exemption, 35% tax rate) or elect into the prior 2010 law (no estate tax, but with carryover basis). If the estate is less than $5.0 million, in most cases it will be best to accept the application of the estate tax and thereby acquire a basis step-up in the assets. Nevertheless, an analysis should still be done to determine whether the heirs are better off with a stepped-up basis or the carryover regime. It is worth noting that, if the estate of a married decedent accepts the application of the estate tax in 2010, the portability provisions do not apply to the unused portion of the $5.0 million exemption. Portability applies only to decedents dying in 2011 and 2012.
For many of our clients who have wills or revocable trusts that are designed to take maximum advantage of each spouse’s estate tax exemption, whatever the amount of the exemption in effect, they may want to revisit the formula language or otherwise review their estate planning documents in light of these changes.
Estate plans must be reviewed to determine whether they take full advantage of the $5.0 million exemption, and, if applicable, the portability of a deceased spouse’s exemption. The temporary nature of the estate and gift tax changes means that plans must be monitored. Congress will likely revisit the estate, gift and GST taxes on or before the end of 2012, and we cannot predict what, if any, action it will take at that time. Nevertheless, many of you have been reluctant to do any estate planning in light of the legislative uncertainty and the possibility of estate tax repeal. Now that we know that the estate tax will be with us for at least another two years, planning, even if temporary, can be resumed. We would be glad to discuss your options.
