FEDERAL ESTATE TAX
RATES – OVERVIEW
The Tax
Relief, Unemployment Insurance Authorization and Job Creation Act of 2010,
signed into law on December 17, 2010, 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 new 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%. This law is only in effect for 2011
and 2012. On January 1, 2013, this law
will “sunset” and only $1,000,000 can be passed tax free with any excess taxed
at federal rates from 41% to as high as 60%.
REUNIFICATION
A great
benefit under the new tax law is that a person can give up to $5,000,000
without a gift tax away during their lifetime.
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.
PORTABILITY
Another
benefit of the new tax law 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: These examples are for illustrative purposes
only. Please contact a qualified tax
advisor for specifics on your individual circumstances.
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