Archive for May, 2010

2011 Tax Implications on Estate Planning

May 17, 2010 Leave a comment

Estate tax changes for 2011 have been in the news due to their unusual nature; however, the vast majority of individuals will not have estates impacted by estate taxes because their estates are not large enough.
However, in brief, the estate tax changes for 2011, are as follows:
Heirs will now be able to use the market price on the date of death for an asset when computing their tax liability, instead of the value of the item when purchased, which provides a step-up in tax basis in most cases.

Estates are now subject to an estate tax, which amount includes all gifts made during the lifetime of the deceased, on estates amounting to greater than $5 million. The maximum tax rate on estate taxes and gift taxes is 35%.

There are a number of ways to reduce your tax payments to be made through your estate include: giving away a large portion of wealth during your lifetime. Individuals can give their children, relatives and others up to $5 million during their lifetimes without incurring federal gift taxes. In addition, individuals can give away an annual amount without reducing their exemption for gift or estate taxes. In 2011, the annual gift tax exclusion is $13,000 per recipient and individuals can give away that amount to as many people as they want. Many wealthy families also reduce the size of their taxable estates by giving money and other property to charity.

But those strategies aren’t practical for families who have most of their wealth tied up in their primary residences and retirement savings. In the first case, you won’t want to likely give away the place you live. In the case of retirement savings, taking withdrawals from retirement plans will trigger income taxes anyway, plus a 10% penalty if the plan owner is under 59½.

A benefit to surviving spouses of a deceased spouse passing away in 2011 is that the spouse will be able to combine any of the unused estate tax exemption of the deceased if the surviving spouse timely elects to do so. For example, if the deceased passes away in 2011 and uses only $3 million of his or her $5 million estate tax exemption, the surviving spouse can elect to use the remaining $2 million of the deceased spouse’s election towards his or her own estate tax exemption, in this case increasing it to $7 million (their own $5 million added to the remaining $2 million from the deceased spouse).

Of course, it is difficult and not advisable to plan to die within a certain year in any case, so knowledge of tax laws impacting estate planning is very useful, and advisable, but never determinative in any particular case.

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