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The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (the “ACT”) was signed into law by President Obama on December 17, 2010. While the ACT provides sweeping changes to the rules governing many tax laws, it finally addressed the rebounding estate tax which was set to return to 2001 levels after disappearing completely in 2010. The purpose of this blog is to highlight only two very specific changes made by the ACT that may directly affect you and your overall estate plan.
1. New and unified estate tax, gift tax and generation-skipping transfer tax exemption rates have been set.
Without the ACT, the federal estate tax exemption would have fallen back to the 2001 level of $1 million and the estate tax rate for estates valued over this amount would have maxed out at 55%. The ACT changes that. For the years 2011 and 2012, the federal estate tax exemption will be $5 million and the estate tax rate will be maxed out at 35%. An estate tax exemption is the amount of money you can own at death before the federal government will tax the remaining assets. In 2009, the exemption rate was $3.5 million. In 2010, the estate tax exemption was repealed such that no estate tax was owed to the federal government regardless of the amount of money with which you passed away. The new $5 million estate tax exemption rate is obviously better than the $3.5 million rate in 2009, but is not as advantageous as the 2010 unlimited exemption amount. However, it will still be an attractive exemption amount for many of you with estates totaling under $5 million.
In addition to the return of a limited estate tax exemption, the estate tax has also become unified with federal gift and generation-skipping transfer taxes such that the gift tax exemption and generation-skipping tax exemption are also $5 million each and the maximum tax rate for both of these taxes is also 35%. The gift tax exemption is the amount an individual can gift over his or her lifetime and not pay a gift tax. The gift, if over $13,000 per person, per year, must be recorded with the IRS, but no immediate tax consequences will occur. At the same time, however, if you gift during your lifetime, your estate tax exemption will be reduced by the same amount. For example, if you gift $2 million in 2010 and pass away in 2011, your estate tax exemption will only be $3 million instead of the whole $5 million. The same is true for the generation-skipping tax which is applied if you skip a generation (i.e. give gifts directly to your grandchildren or great grandchildren.)
2. “Portability” of federal estate tax exemption for married couples.
Perhaps even more advantageous is the advent of “portability” of the federal estate tax exemption. Prior to the ACT, couples wanting to take advantage of each of their federal estate tax exemption amounts needed to undergo specific estate planning that allowed them to capture their exemption amount before leaving their spouse their estate. Tools such as Credit Shelter Trusts and “AB Trusts” were needed to accomplish this goal. Under the ACT, no such planning is needed. The new $5 million exemption per person is portable between spouses so your spouse will automatically pass on her exemption amount. In other words, married couples can now pass on to their children $10 million free from any federal estate tax even without sophisticated estate planning documents. Portability applies to lifetime gifts as well as to assets that pass through an estate plan.
3. Does the ACT affect Medicaid Planning?
You should note that the ACT does not affect the advantages of Irrevocable Medicaid Trusts that are designed to protect assets from creditors while allowing a person to qualify for Medicaid. Those trusts are still very much needed if you want to hedge against the risk of losing your hard earned savings or your home to exorbitant long term health care costs. Remember that pre-planning for Medicaid requires that transfers of assets be done 5 years prior to applying for Medicaid benefits. Moreover, trusts remain a good tool for privacy, avoiding probate, and insuring that children from prior marriages are provided for even if you pass away before your current spouse.
Finally, many estate planning issues still remain. The ACT is only in effect through 2012, at which time the entire system will be revisited yet again. Furthermore, although the federal exemption amounts have risen to $5 million per person, the New York State estate tax exemption is still $1 million. Proper estate planning is still essential to save taxes on both the state and federal estate tax levels if you exceed the exemption thresholds.
We at the Law Office of Craig A. Andreoli, P.C. are cautiously optimistic about the ACT until we see how the IRS starts applying the new laws in practice. It is our pleasure to keep you informed and up to date on current happenings in estate planning. If you want more information about the ACT and whether or not the ACT directly affects you and/or your spouse, please feel free to contact us.
She passed away penniless and unable to recognize her family. I am referring to my grandmother. My grandmother’s story is what motivated me to open the Law Office of Craig A. Andreoli, P.C., which concentrates exclusively on Estate Planning and Elder Law. Her name was Betty, and she and her husband Dan owned a small successful food distribution route in New Jersey. They started out supplying pizza parlors and restaurants with food supplies, but quickly branched out and started manufacturing some of those products. They purchased a small warehouse, and I remember going there with my grandfather and watching the workers make fresh sausage and mozzarella. To this day, the smell of cured meats and garlic salt remains within my memories. At its peak in the 1970’s, the business was worth a few million dollars. Unfortunately, it was also at around that time that my grandfather passed away. Luckily, my grandmother had support from my great Aunt Lucy. Lucy had forgone a family of her own to help out with my grandmother’s family. Aunt Lucy was like a second grandmother to me because she lived with my grandparents Betty and Dan. Aunt Lucy contributed with the household responsibilities, and also worked as a bookkeeper in the business.
As my grandmother grew older, my parents moved her and my Aunt Lucy out to Long Island. Shortly after that, my grandmother was diagnosed with Alzheimer’s disease. She struggled with it for 12 years. The severity of the disease started out small, but rapidly affected her health and memory. At the onset of the disease, my Aunt Lucy cared for my grandmother exclusively. During the last 5 years of the disease, however, when the task of caring for my grandmother became too great for one person, a team of aides was brought in to give her “around the clock” care. Since my grandmother had never sought the advice of an Elder Law attorney before she became ill, nor did my Aunt Lucy seek such advice when my grandmother became ill, the choice was made to use my grandmother’s hard earned savings to privately pay for her health care needs. That pretty much wiped out all of my grandmother’s hard earned savings.
During one of my last conversations with my grandmother, she asked “who are you?” before she stopped mid sentence and pointed out the window. She saw an angel. My grandmother was upset that I did not see the angel. The angel might have actually been there, calling for my grandmother, because she passed away soon thereafter, but I don’t think an angel would have allowed my grandmother’s circumstances to cause her family such stress and pain.
My parents, who did not need my grandmother’s money, never insisted on having my grandmother pursue proper estate planning. After 12 long years, my grandmother had nothing left. It all went to her medical care. In all my life, I have never met a person, who before getting sick, was as generous as my grandmother. She always showered her children and grandchildren with gifts, and more importantly, love and affection. At the end, she had neither to give.
What if she had estate planning in place? What might have been different? First, she could have saved most or all of her assets had she not needed to pay out of pocket for her long term health care. Second, she could have left those remaining assets to the person who made the biggest difference in her life, my Aunt Lucy, who devoted her entire life to care for her and her family. If someone was deserving of my grandmother’s hard earned savings, it most certainly was my Aunt Lucy. However, even if there were assets left to give, my Aunt Lucy would not have been a beneficiary because my grandmother had no Will. Without a Will, all of my grandmother’s assets would have gone to her living children, even though her children were financially secure and did not need the money. Finally, my family could have suffered a lot less grief and worry had my grandmother’s wishes regarding her finances and advanced health directives been set forth in proper estate planning documents. Lesson learned….take care of your affairs while you are in good health. Don’t leave matters to chance!