Review Your Estate Plan in View of Recent Estate Tax Changes

After much uncertainty and speculation regarding the future of federal estate taxes, on December 6, 2010 President Obama announced a tentative deal had been reached with Republicans to extend the Bush area tax cuts. Effective January 1, 2011, estate taxes are once again in effect, but at an exemption of $5 million for an individual, or collectively $10 million for a married couple. The applicable estate tax rate is 35%. This exemption and estate tax rate will be in effect for two years.

Tax historians note that the new estate and gift tax rates are the most generous since 1931, and provide a unique, yet temporary window for the wealthy to utilize various gifting strategies to pass assets to their children without incurring gift, estate, or generation-skipping transfer tax. This tax break impacts a number of American families. According to the Federal Reserve Survey of Consumer Finances, in 2007, 5.4 American households had a net worth in excess of $2 million.

However, even Americans with no intention of making significant gifts have reason to be concerned about this recent estate tax change, and should have their existing estate planning documents reviewed in light of this change. Many trusts contain what are known as “formula clause” provisions, which tie the amount of a bequest to the applicable estate tax exemption. These clauses were designed to maximize the amount a couple could pass on tax-free. Unfortunately, the current exemption of $5 million is significantly different from that of past years, such as the $1.5 million exemption which was in effect in 2005. Thus, if a spouse dies in 2011 with a $3 million estate and unchanged formula clauses, the surviving spouse may be entitled to nothing outright because all of the assets would pass into a trust.

Over the next few months we will examine the recent tax change in more detail, including how this change could affect your estate plan, and the planning opportunities presented by this change. For a personalized consultation regarding your estate plan, contact the Casiano Law Firm.