The Latest in Estate Tax Law

August 3, 2011

Are you taking advantage of estate tax law changes?   If you are married, you should be.

Over the past few years, tax changes haven’t offered many “benefits” for the typical taxpayer.  Yet, the tax overhaul passed in December 2010 offers some specific advantages for families.  One example is that starting in 2011 couples can add the unused estate tax exemption of their spouse (up to $5 million) to their own estate tax exemption. This means it may be possible to transfer up to $10 million tax-free to family and heirs.  This new ability to transfer assets is called “portability.”

The new tax laws also allow individuals to give an unlimited amount to their spouse with no tax applied – either through lifetime gifts and /or through an estate plan. Under previous tax laws, however, it was possible that when the second spouse died, anything above the exempt amount not going to charity would be taxed.  As a way around this, bypass trusts (or family trusts) were used to address the problem.  Funds in bypass trusts are not taxed, since they are covered by the first spouse’s tax-exemption amount, and they don’t count as part of the surviving spouse’s estate. With the new laws in 2011 couples may be able to harness this portability and create more simple estate plans.

Should you and your spouse run out and start changing your estate plan in light of the new tax laws?  The question is worth exploring. It will depend mostly on your current situation – the complexity of your family and current estate plan.  If you have children from a previous marriage, own your own business, are in debt, or have a complex plan for your estate distribution, you will likely require a complex estate plan.  Perhaps most importantly, unless Congress makes the new tax law permanent, it only applies to those who die in 2011 or 2012. This means that in order for you and your spouse to ultimately transfer the current exemption amount of up to $10 million tax-free, you would have to change your estate plans if the tax laws change.

With the ever changing estate tax laws, it is always a good idea to review your estate plan to ensure you are taking advantage of the best options out there.  The IRS provides information about estate tax changes on their website, you should also talk to your Los Angeles area tax professional to find out how to update your estate plan to take advantage of the new estate tax laws.