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Articles: Estate Planning: Peeking Through the Clouds

It seems like estate planning has been “under  a  cloud”. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act  of  2010   the Tax Relief Act for short brought some clarity to the situation. But the estate tax provisions in the new law are scheduled to expire after 2012.

Nevertheless, you can incorporate the latest changes into your estate plan while trying to remain flexible.

To help you plan, here’s a brief overview of the current landscape in estate planning.

Taking shelter: Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate-tax exemption for an individual gradually increased from $1 million to $3.5 million for decedents dying in 2009. At the same time, the top estate-tax rate decreased from 55% to 45%. EGTRRA also “decoupled” the estateand gift-tax systems and retained a lifetime gift-tax exemption of $1 million.

Then EGTRRA repealed the estate tax, but only for dece dents dying in 2010.  The estate tax was scheduled to be reinstated in 2011, with a $1 million estate-tax exemption and a top 55% estate-tax rate. Also, for decedents dying in
2010, EGTRRA imposed “carryover basis” rules for heirs inheriting assets instead of allowing a step-up in basis in value on the date of death.

Caveat: A spousal beneficiary could benefit from up to $4.3 million in exemptions ($1.3 million for non-spousal beneficiaries and $3 million from a spouse).

Change in the weather: For 2011 and 2012 only, the 2010
Tax Relief Act overrides the EGTRRA estate-tax provisions and creates an estate-tax exemption of $5 million with a top estate-tax rate of 35%. The government recently announced  the  inflation-indexed  exemption  for  2012 is
$5.12 million.

The new law also reinstates the “step-up in basis” rules that existed prior to 2010.   Furthermore, it reunifies th estateand gift-tax systems with a $5 million lifetime gift-tax exemption ($5.12 million for 2012).

The new law allows for “portability” of the estate-tax exemp tion for married couples.  If a deceased spouse’s estate doesn’t exhaust the entire exemption, the balance is available to the estate of the surviving spouse.  Thus, heirs may more easily benefit from the maximum $10 million in exemp tions, but only if both spouses die before 2013.

In the wake of the new law changes, lifetime gift-giving to reduce the size of a taxable estate remains a viable option for affluent individuals.  For 2012, you can give each family member up to $13,000 without any gift-tax consequences $26,000 for joint gifts by a married couple.

For instance, a couple could give five relatives a total of $130,000 (five $26,000 gifts tax-free this year). This annual gift-tax exclusion is separate and apart from the lifetime gift-tax exemption.

Finally, other changes, including coordinated changes in the generation-skipping tax for transfers by grandparents, may affect estate planning.  It is recommended that you review any wills and other estate-planning documents with the assistance of your professional advisors.

It is expected that estate planning will be a key consideration in the national elections this year.  Significant new developments will be reported as soon as possible.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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