OHIO ELDER LAW BLAWG

Options for Estates of 2010 Decedents

    The new law regarding Estate taxes signed by President Obama makes two different options for the beneficiaries of estates of those dying last year (2010). 

   Congress reinstated the estate tax (which had been repealed in 2010) with a $5 million exemption and a 35 percent tax rate for 2010. Executors must decide whether to  elect out of the tax for 2010. 

     If the personal representative elects to opt out, there will be carryover basis rules which apply to the estate beneficiaries for income tax basis purposes. Beneficiaries of large estates (sorry Steinbrenner kids) can be forced to pay capital gains taxes on appreciation of assets from purchase through the time of the decedent's date of death.  In other words, there will be an income tax bill, but no estate taxes. If no election is made the $5 million exemption and 35 percent rates will apply for 2010 decedent's estates. In this case the basis of the  inherited property will be the fair market value of the property at the date of death. 

    For estates worth less than $5 million, electing to pay estate taxes may be advisable, as the tax will be zero and you will get a step up in basis on the stock.  On the other hand, estates with significantly more than 5 million may want to elect out of the estate tax, and either pay or postpone events which would cause capital gains. 

Talk to us or your tax adviser for information about your particular situation.

Elder Law Office of Todd W. Bartimole  

Estate and Gift taxes: A New World

The new tax cut extension package signed into law on December 17, 2010 by President Obama, establishes a new estate and gift tax regime for 2011 and 2012. After that, we are back in the land of uncertainty with regard to Estate Taxes.  Despite this, it is hard to withdraw rights once established, so it seems to me that it is unlikely that we will see an estate tax wtih lower exemption amounts, or higher rates. Additionally, the new law gives those who survive people who died in 2010 some options in election of how they would like to pay tax on their inheritance.

Below is an overview of the provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 signed by President Obama.

Exemption and Tax Rate

For this and next year the federal estate tax exemption is $5 million with a tax rate of 35 percent. There is a possibility that there may be an inflation adjustment for 2012, based on the rate of inflation.

A-B Trust Planning may not be necessary any longer for the Fed. Estate Taxes

Any unused federal estate tax exemptions for those who die in 2011 or 2012 are transferable to a surviving spouse.This means that the exemption would effectively be 10 million for a couple without a trust agreement. 

Where a first spouse to die leaves  everything to the surviving spouse, the surviving spouse will have two $5 million exemptions to work with, for a total of $10 million.

The surviving spouse can then leave up to $10 million to beneficiaries without any federal estate tax bill.

Inherited Capital-Gains

For beneficiaries of persons dying in 2011, assets will have a step up in tax basis to the date of death.  For decedents who died in 2010, the law was replaced by a modified carryover basis rule which limited the maximum step up in basis to $1.3 million plus $3 million for assets inherited by a surviving spouse.

Because of the unlimited basis step-up rule in effect this and next year, heirs will not have to pay federal capital gains taxes on the appreciation of property occuring through the date of death (if after 2010).

Estate and Gift Tax Rules Are Now the Same

This was a confusing area of the law, which has been made somewhat easier under the new provisions. The new law puts the lifetime federal gift tax exemption at $5 million, up from 1 million. It is easier because the gift tax exemption is equal to the estate tax exemption. The tax rates are now both 35%.  Now a person can give away up to $5 million in 2011 and 2012 while still alive without owing any gift tax ($10 million for a couple) during life.  To the extent you make gifts that utilize part of your $5 million federal gift tax exemption, your $5 million federal estate tax exemption is reduced dollar-for-dollar.  You are still permitted to give $13,000 per year per person away with no effect on your lifetime 5 million dollar exemption.

Estate Taxes in Ohio

Ohio is one of a few states wtih an estate tax that is not linked to the federal estate tax.  However, Ohio's new Governor is prepared to repeal the Ohio estate tax.  This tax mostly benefits local communities, and will be a burden on those communities as local governments struggle to find funds to operate. 

We will be following developments on the Ohio estate tax as they occur.

 

The Estate Tax and Earning Money the Old Fashioned Way

Recently, John Raese, a billionaire using his own riches to try to win a US Senate seat in West Virginia, declared “I made my money the old-fashioned way — I inherited it.”

Lucky him.  This year, 2010, is the best year to inherit money, because there are no US taxes on inheritance.  Unless Congress acts, next year will be an entirely different story. 

Next year if you die with over one million dollars, and that includes life insurance, your estate will be taxed.  Without any estate planning, the amount over one million dollars will be taxed at 41-55%.  Being dead, this may not be a concern of yours, but your children will be somewhat less able to make the same claim as John Raese did.

Even with the recent fall of real estate values, it is very common for people to have over one million dollars at death, especially when considering life insurance. Take a look at what you have:  house, cars, IRA/401k’s, savings, and insurance.  As people come into my office and I discuss this, it surprises many of them to discover that they will be millionaires at death, and subject to the Estate Tax in 2011.

 There has been discussion of ending the estate tax, but I do not expect that to happen.  My belief is that in our current situation, we need an estate tax in this country.  The accumulation of incredible wealth by a very few, as well as the mounting federal deficit, warrant a federal estate tax. Our income tax policy since the 2001 tax cuts has been too generous to the super wealthy.  In 2007, the top 1 percent of American earners received 23.5% of the nation’s pretax income.  This is about two and a half times the 9 percent that brought in that much in 1976.  Clearly wealth is accumulating at the top.  Unfortunately, during the Bush years 2002-2007 the median income for non-elderly American households went down and the poverty rate rose. 

Having an estate tax acts as a buffer on the over-concentration of wealth.  The question is, at what level?  One million dollars ain’t what it used to be, and the million dollar exemption in 2011 is too low, and will affect too many families. In 2009 the first 3.5 million was exempt, which meant that with proper estate tax planning, a couple could shelter 7 million dollars, which is a nice inheritance to receive tax free.  Probably this is a good place to start.

The way things stand, there are many families who should be looking at their estates, and thinking about having a review to determine whether they will be affected by the Estate tax.  Ohio has an estate tax, but because its tax rate maxes out at 7%, it is not as much of a concern.  However, good trust planning can still save children over $20,000 in taxes if trust planning is done between spouses.

This year is coming to an end, and its a good time to take a look at your current assets, and to decide whether its time to have an attorney review your estate plan.  Please call us if you would like to sit down with us for a review.

Untangling the Estate Tax Mess

The US Estate Tax exemption of $3.5 million has not been extended into 2010.  (yet) Therefore Congress has essentially allowed the estate tax to expire for this year.  However, don't start hoopin' and hollerin' yet, because there is a capital gains tax that heirs will have to pay on inherited property that was not there before.  

Just when we may start to get used to the new laws, 2011 will see the return of the estate tax, and we will go back to year 2001 figures which will sport a 55% tax rate on assets over  an exemption of about $1 million a person.

Unless it changes midstream.  This may be exactly what happens as there is talk of Congress reinstating the estate tax at 2009 levels and doing it retroactively to the beginning of this year. 

The lack of a government blueprint for the estate and capital gains tax has made it very difficult for estate planners and clients to properly plan over the last ten years.  This latest uncertainty is not helping matters any.

For instance, if your grandfather dies 2010, you will not know if there will be estate taxes owed, or capital gains taxes owed. If you are a  trustee,  administrator or executor,  you probably won't feel all that comfortable paying money out of your trust or estate when the government might turn around and tell the heirs that they have to pay the money back for taxes.

While I always encourage questions, answers in such a volatile landscape don't come easy.

-Todd W. Bartimole

House Extends Estate Tax Levels

Facing a December 31 deadline, the U.S. House of Representatives has voted 225-200 to make permanent the federal estate tax rules that have applied in 2009. The measure would exempt from taxation the first $3.5 million ($7 million for a couple) of inherited wealth and would impose a 45 percent tax on estates above those levels. The question of what to do about the estate tax now moves to the Senate, where prospects for passage of a similar bill are uncertain.

Two IRA Account Changes Coming Up

During the financial crisis there were two rules which were changed for 2009 with regard to IRA's.  These changes will be expiring at the end of the year. 

–Required minimum distributions: Normally if you are over age 70-1/2,  you are required to take Required Minimum Distributions (RMD) from traditional IRA's or 401(k) funds.  These distributions are reported as income in the year of withdrawal.

However, the government suspended 2009 RMD in order to help investors keep some of their money and recover from the market crash.  Next year you WILL have to take RMD, so plan for it now. 

–Tax-free charitable contributions:  individuals of 70½ and over are able to make charitable donations of up to $100,000 from Roth and Traditional IRAs without counting the distributions as taxable income.

December 31st will bring the end of this ability, so use it soon or forever hold your peace. 

What is the plan for the Estate Tax?

As many of my clients know, the Federal Estate Tax (FET) is slated to temporarily terminate at the end of this year.  This was part of the Tax Cuts passed by President Bush approximately 8 years ago. 

Currently there is an exemption from paying this tax if your taxable estate is $3.5 million or less, or $7 million for a couple with a properly funded A-B trust plan. (Please call our office if you have questions about what this is). Technically, the FET does not end, its just that the exemption from the tax is unlimited beginning January 1, 2010.  The exemption is then reduced to $1 million in 2011, meaning that if you die with an estate over $1 million you will be subject to the FET in 2011.  This is because the law President Bush signed expires on December 31, 2010.

Therefore, 2010 is a looking like a good year to die, if you are gifted in planning such things, and don't want your heirs to pay any Federal Estate Tax.

Republicans and Democrats have had many proposals to permanently set the exemption level to address the law expiring at the end of next year.  Most have ranged between $3.5 million and $5 million.  However, there are some rumors that a Senate staffer has disclosed that the Democrats will extend the $3.5 million exemption through 2010, and then let the tax cuts expire, thus allowing the law to
revert to its prior $1 million level. With the budget deficit swirling out of control, this rumor may prove accurate.  Stay tuned for more as it arises.

Proper planning for any of these situations is important.  Many trusts we see do not have proper provisions necessary to adjust for tax planning for the unknown future FET levels.  Don't hesitate to contact us if you have questions or want your current trusts reviewed.

Estate Tax Reform: Summary of Candidate's Positions

    Recently the Tax Policy Center of the Urban Institute and Brookings Institution has estimated the outcomes of the two presidential candidates' proposals -- and other congressional proposals -- compared to current law.

    Under the current law, the estate tax will be repealed for one year in 2010 and then return to an individual exemption of $1 million and the top tax rate was 55 percent. According to the report, if this law is not changed, it will generate about $490 billion in estate taxes through 2018. Currently the individual exemption is $2 million, and goes to $3.5 million in 2009.

The Obama proposal: Sen. Obama has proposed permanently extending the 2009 estate tax provisions. Beginning in 2010, estates of $3.5 million or less would be exempt from tax and the estate tax rate would be 45 percent. Under his plan, in 2011, there would be 7,200 taxable returns. Between 2008 and 2018, the Obama proposal would generate $292 billion in estate taxes, about 60 percent of the $490 billion projected under current law.

The McCain proposal: Sen. McCain's proposal would permanently raise the estate tax exemption to $5 million and cut the rate to 15 percent beginning in 2010. In 2011, only 3,600 returns would owe any tax, about half the number under the Obama proposal. Through 2018, the McCain plan would generate $100 billion in estate taxes, only about 20 percent of the amount projected under current law.

    These proposals mirror Democratic and Republican Party legislation which have previously been introduced.  One interesting proposal has been to allow a spouse to keep their deceased spouse's individual exemption, which would effectively double the surviving spouse's exemption.  This would obviate the need for A-B trust planning for federal estate tax.

    Stay tuned!

 

House of Representatives Passes "Permanent Estate Tax Relief"

The Permanent Estate Tax Relief Act of 2006 (H.R. 5638) was recently passed by the House of Representatives.  The Bush administration has been trying to repeal the estate tax altogether, but since the effort failed to pass the Senate, the house put together what Republicans call a compromise bill.  The bill now goes to the Senate.

What does it Mean? 

Lower Gift and Estate Tax Rates - In 2010, the rate on estates from $5 million to $25 million would be lower than most income tax levels. The tax rate would be 15%. Estates over $25 million would pay double  the capital gains rate, or 30%.

Portable Spousal Exclusions - Under the proposal, married couples will receive a $5 million gift or estate exemption for each person. If this exemption is not used by one spouse, the unused portion may be carried forward and used by the survivor. This would obviate the need for A-B Trust planning. The survivor could thus have a gift and estate exemption of up to $10 million.

Stepped-Up Basis - Under current law, most assets transferred because of death receive a "stepped-up" basis to current fair market value. This rule would be continued in 2010 and later years.

Timber Capital Gain Tax Break - In an effort to appeal to moderate Democratic senators from states with substantial timber interests, there is also a new 60% deduction for timber gains. The remaining 40% is taxed at ordinary income rates.

The bill is estimated to cost approximately $283 billion. It is possible that charitable giving will be negatively affected by the bill, and the trend of the accumulation of wealth among the wealthy will grow exponentially over subsequent generations.

Democrats proposed that the estate exemption be set at $3 million for 2007 and 2008 and then be made permanent at $3.5 million in 2009, as is written in current law. This $3.5 million exemption would exclude 99.7% of all estates from the estate tax.

The difference between the $3.5 million proposed exemption with current rates and the cost of the Permanent Estate Tax Relief Act would to generate enough income to cover a quarter of the future Social Security shortfall.