FEDERAL ESTATE TAX RATES – OVERVIEW
The Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010 was signed into law on December 17, 2010. This law provides major changes to the federal estate tax rules & rates. For 2011 and 2012, each person can leave $5,000,000 estate tax free with amounts over $5,000,000 taxed at a federal rate of 35%.
A couple could leave up to $10,000,000 estate tax free under this law. Please be aware that many states impose a separate estate or inheritance tax that can cause the combined state and federal tax rate to approach 50%.
On January 1, 2013, this law will “sunset” and only $1,000,000 will be able to be passed tax free with any excess taxed at federal rates from 41% to as high as 60%.
A great benefit under this tax law is that a person can give up to $5,000,000 during their lifetime without having to pay a gift tax. Previously, a person could only give away $1,000,000 during their lifetime without gift taxes. The Estate and Gift Tax rules have been “reunified” meaning the rates for gift taxes and estate taxes are the same. A person can also choose to include a generation skip of up to $5,000,000 without incurring any generation skipping tax.
Another benefit is that a couple does not automatically “waste” the $5,000,000 estate tax free amount if one spouse does not have $5,000,000 of assets titled in their name at the time of their death.
Assume a couple has a combined net worth of $10,000,000 comprised of $8,000,000 of assets owned by the husband and $2,000,000 of assets owned by the wife. Under the new law, if the wife dies first and leaves her $2,000,000 to the children, the executor can make an election to transfer her unused exemption of $3,000,000 to her husband for use at his death. At the husband’s death, he would be able to leave $8,000,000 estate tax free by using his exemption of $5,000,000 and his deceased wife’s unused exemption of $3,000,000.
All of these rules end on January 1, 2013.
Disclaimer: Examples are for illustrative purposes only. Please contact a qualified tax advisor for specifics on your individual circumstances.