Friday, December 17, 2010

Estate Tax Watch - A Christmas Present From Obama

Thanks Obama - disregard what lies below.  We now have a $5 million exemption and an Estate Tax rate of only 35%. 

However, with a 2 year time span on this deal it shows that we will need to keep watching and adjusting our Estate Plans.

Old post follows:

Everything continues to indicate broad bipartisan support for a permanent Estate Tax Exemption in the $2 to $5 million range.  However, that consensus opinion has been the same for at least 2 years.  With only one month left in 2010, and increasingly partisan comments from Washington, we need to prepare contingency plans for a $1 million Estate Tax Exemption beginning January 1, 2011.

Most married couples with an AB or ABC Trust should be ok, at least temporarily, if the Trust was drafted or amended following the 2001 Bush Tax Cuts.  Post 2001 Trusts should have been designed to flexibly accommodate an Estate Tax Exemption that started at $1 million and increased to $3.5 million before our Estate Tax Holiday in 2010. 

Singles (including those whose spouses have predeceased them) need to have a contingency plan if their assets are at or above $1 million as they now face a 55% Estate Tax.

There are some easy fixes that can be implemented into an Estate Plan to reduce taxes.  An amendment to your Trust implementing a Charitable Lead Trust (CLT) can shelter almost unlimited amounts from Estate Tax.  You just need to be willing to allow a charity to receive the income from said assets for a certain period of time prior to the assets being distributed to your beneficiaries.

LLC’s can still be used and Valuation Discounts (from 5% to 40%) for the assets transferred to LLC’s have been repeatedly upheld by the Courts if implemented properly.  While there has been talk of restricting the use of Valuation Discounts, no such legislation is currently pending, and current transfers to LLC’s should receive the discounts provided by current law.

While married couples are likely ok for the first few months of 2011, if the Estate Tax Exemption stays in the $1 million range, married couples may benefit from the strategies above, as well as increased use of the Marital Deduction and Lifetime Gifts.