One of the first things that people should know regarding the federal estate tax is that this is a tax for “wealthy” people. The majority of people, people who do not have millions of dollars in their bank account, should not fear that the federal estate tax will substantially deplete their loved-ones’ inheritance. Additionally, Florida is one of the few states that does not have its own state estate tax, providing further incentive to reside here.
However, substantial changes occurred at the end of 2010 regarding the federal estate tax. The government recently enacted new legislation known as the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which provides for these key changes in the estate tax:
The current law applies only to decedents dying on or after January 1, 2010. Estates that have less than $5 million ($10 million for married couples) are exempt from paying any federal estate tax, which is up from the $3.5 million exemption of 2009. Any amount above this $5 million threshold is taxed at a flat 35% rate.
One aspect of the new law that provides for a rather drastic change from the old is the concept of “portability.” In prior years, if a decedent died with a surviving spouse and the decedent’s estate did not use all of the allotted exemption, the remaining amount of the exemption would be lost without proper estate planning. With the new law, if an estate does not use all of the $5 million exemption, the surviving spouse will be able to apply that remainder to his or her own estate tax exemption.
These changes in the law certainly affect how lawyers and their clients want to approach the issue of estate planning. For example, many trusts are created for the purpose of taking advantage of your deceased spouse’s tax exemption. Some people may believe that this concept of “portability” will make such trusts unnecessary. However, it would not be wise for people to jump to these conclusions. Having trust as part of your estate planning is still very important and highly recommended. Many types of trusts are irrevocable and provide protection from creditors or just from spendthrift beneficiaries. Additionally, people wishing to segregate and preserve assets for their children, for example in the context of a second marriage, would be advised to have a trust. Finally, this new law will automatically expire at the end of 2012, unless the government takes further action, and there is no guarantee on what the future laws will look like. It is far safer – and more cost-effective in the long run – to spend the money to hire a competent estate planning lawyer to implement a plan to protect one’s assets from taxation, creditors, or an unwanted distribution scheme.