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%.
REUNIFICATION
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.
PORTABILITY
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.
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