Here's what taxpayers are expected to get.
A $5 Million Exemption: For estates of individuals who die in 2011 or 2012, the proposed tax-cut extension package would establish a $5 million federal estate tax exemption. That's at the upper end of what we reasonably could have hoped for. Big estates would be taxed at "only" 35% above the $5 million threshold, and that's about as low as we reasonably could have hoped for.
Ability to Leave the Unused Exemption to the Surviving Spouse: For the first time, married individuals who don't use up their exemptions would be able to pass along unused amounts to their surviving spouses.
For example, say you die in 2011 with a $3 million estate. With the $5 million exemption, you could leave everything to your kids without any federal estate tax hit. Then, the executor of your estate could pass along your $2 million unused exemption to your surviving spouse. If she then dies in 2011 or 2012, she could leave up to $7 million more to the kids without any federal estate tax hit (by using her $5 million exemption, plus your unused $2 million exemption). Alternatively, you could generally leave your $3 million to your spouse without any federal estate-tax hit and without using any of your $5 million exemption. If your spouse then dies in 2011 or 2012, her estate would have a whopping $10 million exemption to play with (her $5 million plus your unused $5 million). So she could leave up to $10 million to your kids without any federal estate-tax hit.
Key Point : The ability to effortlessly pass along your unused exemption to your spouse would be a very favorable development. It would ensure that both your exemption and your spouse's exemption could be taken advantage of without having to set up trusts or jump through any other hoops to do so. Only truly well-off couples would get socked with the federal estate tax.
Unlimited Income Tax Basis Step-Up for Inherited Assets: The proposed legislation would also restore the familiar rule that allows the income-tax basis of inherited capital-gain assets (such as real estate and stock) to be stepped up to reflect the full fair market value on the date of death. This rule was suspended for 2010 and replaced by a complicated provision that limits income-tax basis step-ups to $1.3 million, plus another $3 million for assets inherited by a surviving spouse. Bottom line: if the unlimited basis step-up rule is restored as expected, heirs won't owe any federal capital gains taxes on appreciation that occurs through the date of death.
Equalized Estate and Gift Tax Exemptions: Last but not least, the proposed legislation would set the lifetime federal gift-tax exemption at $5 million – same as the estate tax exemption. So an unmarried person could give away up to $5 million while alive without paying any federal gift tax. A married couple could give away up to $10 million. This is a huge improvement over the current $1 million gift-tax exemption. (To the extent you dip into your gift-tax exemption, your estate tax exemption would be reduced dollar-for-dollar.)
Stay Tuned: This Is Not a Done Deal
The proposed estate-tax changes are beneficial, and the increased gift-tax exemption would be a nice bonus. However this stuff must get through both the House and Senate to become law. I think that will happen, but it's too soon to celebrate. Once the dust settles, I'll have some specific strategies to tell you about.
Read more: Tax Package Includes Favorable Estate Tax Changes - SmartMoney.com http://www.smartmoney.com/personal-finance/taxes/tax-package-includes-favorable-estate-tax-changes-1292368597065/#ixzz18II5ufRF
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