New Estate Tax Issues for 2010-2012 and Beyond ...

If you had a relative, friend or acquaintance who died in 2010 they had to pay zero taxes, even if they left billions to their heirs. But there was one feature of that one-year estate tax holiday that probably wasn’t too popular with heirs: they also inherited the deceased person’s cost basis. So while the estate may have saved on estate taxes, heirs may now be sitting on large unrealized capital gains that they will eventually have to pay taxes on, though those tax rates for long term gains have remained at 15% for the time being (long term capital gains rates for clients in the 25% income tax bracket or higher are slated to move to 20% in 2013, a rate increase of 33%).

Now that we are in 2011 though, the estate tax comes back, and with it, the step up in cost basis. The exemption amount is now $5 million per person, and the top tax rate is 35%. This new estate tax comes with something called portability, which will be advantageous to spouses. If one spouse dies without using up his entire $5 million exemption, the remaining amount can be added to the surviving spouse’s exemption amount. This will sometimes eliminate the need for a bypass trust to accomplish the same objective.

Also in 2011, the lifetime gifting tax credit moves up to $5 million, providing an opportunity for people with large estates to use estate planning to give much more to their children so that the assets are out of the estate prior to the persons death. We don’t know yet what will happen in 2013, if nothing is done, we could revert back to the $1,000,000 estate tax and gift tax exemption and the 55% rate from years past.

Now that we have clarity on the estate tax - for a couple of years, at least - wealthy individuals have a real opportunity to make some smart, tax saving planning decisions. Don’t put it off. Make an appointment early in the year to meet with an estate planning attorney, preferably one who works with your financial advisor. If you don’t have one, your financial advisor is a great resource who can point you in the right direction.

Eric Willer, CFA
Regional Vice President - Fusion Analytics
214 270-2172
[email protected]