The new law provides that each individual can die with $5 million in assets before they will be subject to estate tax
By David J. Zumpano
Congress and President Obama passed a new tax bill in the last week of December 2010. So, what does it mean to you?
In 2001, President Bush, with Congress, enacted massive tax changes that were set to expire on Dec. 31, 2010.
Literally, on the eve of the 2001 law expiring, President Obama and Congress extended many of the tax laws implemented by President Bush, and in several areas, even expanded them.
If the laws had reverted back to the 2001 levels on Jan. 1, 2011, the top income tax rate would have been 39.6 percent, rather than the current 35 percent, and capital gains could have been taxed as high as 28 percent, rather than the 15 percent maximum in the new law.
Perhaps, the greatest changes in the new law, however, related to estate taxes.
The new law provides that each individual can die with $5 million in assets before they will be subject to estate tax, and if subject to tax, it is at a 35 percent rate.
If the law had expired, the limit would have been only $1 million with a 55 percent maximum tax rate. In addition, the new law increased an individual’s lifetime gift exemption from $1 million to $5 million.
Essentially, each person can now give up to $5 million away in their lifetime without any gift tax consequence.
Perhaps, the most surprising element in the new law came with the portability of the estate tax to a surviving spouse. Prior to the new law, if one spouse died, he or she would’ve needed to create trusts at death, to utilize the $5 million exemption provided by the government, or it would’ve been lost.
Under the new law, the use of trusts are no longer required after death to preserve an exemption, but rather, a surviving spouse may elect to assume the unused credit of the deceased spouse. In essence, this may permit a surviving spouse to have up to $10 million of assets at their death, without having to pay an estate tax.
The new tax law virtually eliminates any worry of gift or estate taxes for 99.9 percent of Americans.
But beware: the new law passed in December 2010 is only effective until Dec. 31, 2012.
What happens after that date is anyone’s guess.
So, while you no longer have to worry about the tax law, be careful not to ignore the more relevant elements to planning, such as protection from a spouse’s remarriage, children’s creditors, divorce, and lawsuits, or even the threat of going into a nursing home.
Proper estate planning ensures all issues, including taxes, asset protection, Medicaid, and most importantly, your family, are provided for.
David J. Zumpano is an attorney and a certified public accountant (CPA). He operates Estate Planning Law Center. He can be reached at 793-3622.