Estate Law – More Changes

The more things change, the more things stay the same. The lame duck Congress provided us clarity for the estate tax law for the years 2011 and 2012. However, they left the door wide open to possible changes for 2013 and beyond. If you recall, in 2001, the EGTRRA Act passed by Congress set in motion the elimination of the estate tax in 2010. If Congress had not acted, the estate tax would have reverted back to what it was in 2001: a $1 million estate exemption and a top tax rate of 55%.

The Tax Relief Act Congress passed in December of 2010 made significant changes to the federal estate and gift tax laws. But once again, if Congress does not act by January 1, 2013, the estate tax provisions will sunset and possibly revert back to what it was in 2001.

Estate Tax Law 2011 and 2012

The new estate law for 2011 and 2012 provides each person a $5 million estate exemption. This is the amount each person can pass at death to anyone without incurring any estate tax. The $5 million exemption is great news, however since most people are not planning on dying in the next two years, this increased exemption only provides more uncertainty for the future.

Surprisingly, and potentially more important, Congress also provided a significant increase in the lifetime gifting exemption from the 2010 level of $1 million to a new level of $5 million per person. Thus, a married couple could gift up to $10 million during their lifetime. This initial gift, as well as all future appreciation on this gift, will pass free from any gift or estate tax.

Another benefit of the new estate tax law is the reduction in the top estate tax rate to 35%. However, as mentioned above, if Congress does not act by January 1, 2013, the top estate tax rate will revert back to the 2001 rate of 55%.

For tax years 2011 and 2012, the new law provides the opportunity for the “portability” of any unused estate exemption at the death of the first spouse. For example, if the first spouse dies having used only $1 million of his/her $5 million estate tax exemption, an election is made on the first spouses estate tax return to permit the surviving spouse to receive the unused $4 million worth of exemption. Thereafter, the surviving spouse shall have an exclusion amount of $9 million to use for lifetime gifts or his/her estate exemption at death.

This new provision is extremely beneficial because it provides the surviving spouse an opportunity to remedy any failed estate tax planning resulting from poorly structured estate documents or assets not being titled appropriately upon the first death.

One controversial aspect of the 2010 estate tax law was that it replaced the “step-up in basis” rule with what is known as “modified carryover basis.” Congress realized that the 2010 law caused problems with accounting for basis and appropriately reinstated the full step-up in basis rule upon an individual’s death for 2011 and 2012. Thus, the beneficiaries of an individual’s estate can sell the deceased’s assets and pay little or no capital gains taxes on the inherited assets.

A majority of the estate tax law changes could impact an individual’s trusts and wills which are important documents needed to minimize or eliminate any estate tax. However, equally important are an individual’s ancillary documents such as a Health Care Power of Attorney, Financial Power of Attorney and Living Will. We recommend having these documents updated every 7-10 years due to changes in family dynamics, adulthood of your children or changes within your home state’s health care laws.

One Additional Note

At times, clients have asked whether their adult children should have estate documents. We thought it best to address this question broadly in this Viewpoint. Almost all states define the age of majority at age 18. At such age, the parent is no longer considered the child’s legal representative because the child is considered an adult, and has rights to his/her privacy. Having a Health Care Power of Attorney for the child permits the parents to legally act on their child’s behalf for health care decisions. Additionally, a Financial Power of Attorney is important for a child because it provides an individual the right to act on the child’s behalf as a guardian without having a court decide who is in charge of the child’s finances.

Creating and updating estate documents due to changes in tax law is important and a significant step. Having these estate documents prepared for your adult children is as equally important.

If you have any questions, please don’t hesitate to contact us. If you’re not currently a client, but would like to schedule an appointment, please contact Lisa Reynolds at (513) 792-6648 or [email protected].

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser. Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & 2B filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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