The following posting was created by Randick O’Dea & Tooliatos, LLP partner Nick Tooliatos. Nick is a Certified Specialist in Probate, Estate Planning and Trust Law. Nick recently returned to the firm after a 1-year deployment in the Army Reserves.
As you may have known, 2010 was an exciting year for me. As an Army Reserve Officer, I spent the year deployed on active duty as the Deputy Commanding General of the 1st Theater Sustainment Command, working in Kuwait, Afghanistan, Iraq, Egypt and Kyrgyzstan. We had the mission to logistically support both the substantial drawdown of forces and equipment from Iraq, while at the same time, uplifting the 30,000-troop surge and required equipment into Afghanistan. It was a tremendous experience working with thousands of great American service members. I am grateful for your continued support to the law firm and me during my absence. I am back to work now, full-time, and I look forward to seeing you one of these days, soon.
To make matters even more interesting for all of us in 2010. . . in mid-December, Congress enacted new tax legislation that may affect your estate plan. When the President signed the new “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” (“TRUIRJCA”, or “2010 Tax Relief Act”) the federal estate tax sprang back to life. For at least the next two years, the IRS will collect a 35% tax on all estates worth more than $5 million. This article provides you with a brief overview of the new law, and more importantly, gives you some things to think about as you consider how it may affect you.
In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the first of the two large legislative packages that contain most of what are now commonly referred to as the “Bush Era Tax Cuts.” EGTRRA gradually lowered the maximum estate tax rate and substantially raised the estate exemption amount until 2010, when the federal estate tax was to be eliminated – for only one year.
The repeal of the estate tax led to several well-publicized instances in which famous people died in 2010 leaving multibillion-dollar estates that passed to their heirs without paying so much as a penny in federal estate tax. When the estate tax disappeared, a new capital gains tax regime appeared, but again only for 2010. This state of mass confusion and uncertainty prompted the 2010 lame duck Congress to quickly pass the 2010 Tax Relief Act.
The new law brings back the estate tax, at least for the next two years. It also provides some interesting new provisions that present estate planning opportunities for you to consider.
For 2010, the estate tax exemption amount is $5 Million and the top rate is 35%. During 2011 and 2012, the top rate will, likewise, be 35%. For 2011, the exemption amount will be $5 million per individual (indexed for inflation after 2011).
For people who died in 2010, their executors can choose tax rules to apply either the law as it existed in 2010 under the old law, or the new provisions imposed under TRUIRJCA. That’s important because executors will have to pay close attention to determine whether it’s better for heirs to pay higher capital gains tax later when property is resold, or whether it’s better to subject the estate to the estate tax rules and save capital gains taxes later. For families who have owned small businesses, family farms, or have otherwise held investments for a long time, this might be a pretty difficult decision.
Starting in January 2011, the gift tax will be reunified with the estate tax. This means that the $5 million estate tax exemption will also be available for gifts made during life. As a result, families have much more powerful gifting options available to them now than they ever had in previous years. Many families will now be able to help to provide for their children, grandchildren, or other loved ones during their lives – so they can witness the joy first-hand – rather than having to wait until their death to make substantial tax free gifts.
One of the other major features of TRUIRJCA is the new concept of “exemption portability.” This feature allows married couples to actually share their estate tax exemptions, making it easier for them to shelter up to $10 million from taxes. There are some important nuances to portability that we have to plan for, but this feature adds a lot of planning flexibility for married couples.
How You Are Affected?
This law impacts you in several ways. First, we need to make sure that your property will be divided according to your desires, and not dictated by Congress or by state law. For more than 50 years, it has been common to use a mathematical formula to divide the assets of a married couple when the first spouse dies to maximize estate tax savings. Likewise, formulas have been used to provide funds for charitable causes and to benefit family and friends. With such increased exemptions impacting “formula clauses” in wills and revocable trusts, it is probably in your best interest for us to review your estate plan to be certain the plan will work as you intend.
Frankly, most estate plans should be reviewed every few years to make sure that the plan is not only consistent with the state of current law, but to also make sure that it reflects the family’s needs and circumstances. The new tax law provides a perfect reason for you to sit down and review your goals and make sure the important pieces of your plan still fit.
What Should You Do?
Please call my office at 925-460-3700 or email me at email@example.com if you would like to schedule time to review your estate plan. I can then make any appropriate recommendations for you to consider and will discuss any changes that I believe are necessary for this law. The tax landscape changes fairly frequently, and it has changed dramatically over the past decade. Your estate plan should be as flexible as possible to make sure that your wishes are fulfilled from 2011 and beyond. As you may recall, I have previously advised you that you should revisit your plan periodically to make necessary adjustments, not only for the occasional law changes, but the often more common changed circumstances of you own life.
Is This All About Taxes?
Estate planning has much less to do with taxes and much more to do with making sure your wishes are known and honored. Families change, needs and interests change, and sometimes your plan should change, accordingly. The current tax landscape simply acts as a reminder that you should revisit your estate plan regularly.
I look forward to hearing from you.