By now you have probably heard the news that Congress and President Obama passed a new tax bill in the last week of December 2010. For many, there is still concern over what it means for them personally. Here is a high level summary.
In 2001, President Bush oversaw massive tax changes with Congress that were set to expire on December 31, 2010. Literally, on the eve of the laws reverting back to the 2001 levels, President Obama and Congress extended, and in some cases expanded, many of the tax laws implemented by President Bush.
Had the laws reverted back, the top income tax rate would have gone to 39.6 percent, rather than the current 35 percent, and capital gains could have been taxed as high as 28 percent, rather than 15 percent as provided 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 tax, and if subject to tax, the tax rate would be 35 percent.
If the law had gone back to previous levels, the limit would have been only $1 million in assets before tax with a 55 percent maximum tax rate.
The new law also increased an individual’s lifetime gift exemption from $1 million to $5 million. Essentially, each person can give up to $5 million away in their lifetime without any gift tax consequence.
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, they would need to create trusts at their death to utilize their $5 million exemption provided by the government. If they did not use it, they would lose it. Under the new law, the use of trusts are no longer required after death to preserve that exemption, but rather the surviving spouse may elect to assume the unused credit of the deceased spouse. In essence, this may permit a surviving spouse to die with up to $10 million of assets without an estate tax.
One of the potential problems with the law change is that it may give some a false sense of security. Tax savings is just one reason for creating trusts.
For most people, more important reasons to properly plan their estate include, ensuring that the assets go where they are supposed to go, when they are supposed to go and are protected from lawsuits, claims and administrative costs and delays. Most want to make sure that they are not subject to claims such as nursing homes, predators, creditors, divorces and the like.
In short, proper estate planning isn’t just about tax savings (and there are still a number of tax saving opportunities for the right client.) Proper planning is really about control over your assets to make sure that your goals are met.
The last thing to keep in mind is that the law change presents a golden opportunity. Congress, in passing the law, only saw fit to make it last for two years, meaning there is a chance that the old tax will still come back in 2013. Stay tuned.