2011-01-21 / Columnists

Spotlight on Elderlaw

How the New Estate Tax Legislation Can Affect Your Planning
Commentary By Nancy J. Brady, RN, Esq. And Linda Faith Marshak, Esq.

As you may be aware, at the close of 2010 Congress approved legislation to extend the Bush era tax cuts for the next two years. In order to understand what this means for most of us in the middle class, it helps to know some history of the estate tax legislation.

The federal estate tax was first enacted in the early part of the 20th century, and the rates fluctuated through the years.

The Republican’s longstanding argument against the estate tax was that the taxing of one’s net estate can force the sale of farms, businesses, and real property in order for heirs to pay the tax (due within nine months of the decedent’s death). Democrat’s (as well as some other wealthy individuals) defense of the estate tax was that the tax was necessary to balance income inequality, especially with regards to capital gains that were not taxed during the wealthy decedent’s lifetime.

The Bush era estate tax cuts resulted in decreasing the amount of federal estate taxes due through 2009, eliminating the federal estate tax entirely in 2010, and scheduled the tax to return in 2011 for all estates with a net value of over $1 million, at the rate of 45 percent. The Republicans planned to enact a full repeal of the estate tax before 2011.

The Democrats gained control of Congress this year, resulting in the decision to extend the tax cuts over the next two years, to $5 million at the rate of 35 percent. One can pass any amount to a spouse (provided they are US citizens) free of tax. If one passes without a spouse, that individual can pass up to $5 million free of federal estate tax.

The excess over $5 million dollars will be taxed at the rate of 35 percent under the new legislation. Married couples with estates in excess of $5 million can establish estate plans to pass up to twice that amount (up to $10 million) free of federal estate tax.

Furthermore, individuals who passed away in 2010 will have the option of applying the law in effect in 2010- no estate tax, but capital gains tax would have to be calculated on all assets; or the 2011 legislation, which exempts the first $5 million of the individual’s estate.

For estates in excess of the federal limit, it could make sense to apply the 2011 law with the capital gains tax advantages, since the capital gains tax is 15 percent, compared to the 35 percent federal estate tax rate.

Additionally, the 2011 legislation increased the gift tax exemption- from $1 million to $5 million. This means that wealthy individuals can make up to $5 million in lifetime gifts free of tax within the next two years; and with advanced estate planning, can structure gift giving plans to multiply the amount of “tax-free” gifts.

All of these changes to the federal and estate gift tax legislation require estate planning, to take full advantage of the tax minimization strategies available under the federal law.

Now, let’s make sure you’re readingin New York State, if your assets are worth more than $1 million, there will be a New York State estate tax to be paid.

The tax can be as high as 16 percent, depending upon the amount the estate is in excess of the $1 million. Additionally, the amount of state taxes paid on the net value of one’s estate can be used as a credit against the federal estate tax due, if any. If your estate includes real property, life insurance, retirement and other savings, it is quite possible that the net value of your estate is worth over $1 million.

For tax planning, as well as to plan for the uncertainties of life- such as illness, incapacity and long term care needs, Estate Planning should be on your list of New Year’s Resolutions! The attorneys can be reached at 718- 945-7777 or 718-738-8500.

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