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2012 CCH Whole Ball of Tax
2011-2012 Estates Benefit from Low Taxes; 2013 Could See Significant Hike Unless Congress Acts
CCH Reviews the Ever-changing Estate Tax Laws
Note: The below text was updated on March 8, 2012
(RIVERWOODS, ILL., January 2012) – While death and taxes may be certain, just exactly how much tax is generated at death remains ever-changing, making estate tax planning an ongoing challenge, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).
“Last-minute legislative activity at the end of 2010 provided a roadmap for estates of decedents dying in 2011 and 2012,” said CCH Senior Estate Tax Analyst, Bruno Graziano, JD, MSA. “But just as with Economic Growth and Tax Relief Reconciliation Act of 2001 , the 2010 Tax Relief Act again includes a sunset provision. This could mean that we will see the same uncertainty later this year or even into next year for future estates that we saw in 2010 as we wait to see if Congress will allow the provisions to sunset or again extend them.”
In late 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) reinstated the estate tax and the generation-skipping transfer (GST) tax for decedents dying and GSTs made after December 31, 2009. The estate tax provision allowed for a maximum rate of 35 percent with a $5 million exclusion (indexed for inflation) for estates of individuals dying in 2010 through 2012. The Act also reunified the gift and estate taxes and included other provisions for 2011 and beyond.
However, absent Congressional intervention, in 2013 , the estate tax returns to the pre-EGTRRA (Economic Growth and Tax Relief Reconciliation Act of 2001) rate of at least 55 percent. The exclusion would be $1 million, with a 5-percent surcharge applying to large estates, in excess of $10 million.
Estate Planning Considerations for 2011-2012
For 2011 and 2012, the gift tax is reunified with the estate tax at a top rate of 35 percent. The exclusion amount for the estate, gift and GST tax is $5 million for 2011 and $5,120,000 for 2012. The annual gift tax exclusion remains the same for 2011 and 2012 at $13,000 per donee or $26,000 for couples using gift splitting.
While the 35-percent rate and $5 million exclusion are much more generous than would exist had the estate tax been allowed to sunset, families and estate planners are finding some immediate challenges dealing with the current estate tax law. This includes the complexity of the portability provision as well as a need to more closely evaluate other estate planning techniques – while they are still available.
For 2011 and 2012, the estate of a surviving spouse may be able to use the unused portion of their deceased spouse’s estate tax exclusion. This portability election could exempt $10 million from estate tax. For example, if one spouse died in 2011 after only using $1.5 million of her exclusion, her husband would still have his $5.12 million exclusion (assuming he survived into 2012) as well as the remaining $3.5 million of his wife’s exclusion. The additional amount would also be available to the surviving spouse for gift tax purposes. However, some estate planners question its ultimate value.
“Estates under the current exclusion amount are generally not required to file a federal estate tax return Form 706 the preparation of which can be very cumbersome and expensive. However, if they wish to make the portability election, they are required to file that form. In addition, the remaining exclusion will not be indexed for inflation nor does it offer the same creditor protection as a trust,” Graziano noted. He added that because the provision is scheduled to sunset at the end of this year, it would not be available to the surviving spouse if he or she survived past 2012 unless the current law is extended.
Popular Techniques in Lawmakers’ Revenue-raising Spotlight
In the past few years, two common estate planning tools have gained increasing scrutiny as Congress looks for additional sources of revenue: Grantor Retained Annuity Trusts (GRATs) and Family Limited Partnerships (FLPs). In addition, the Administration's recently released revenue proposals for fiscal year 2013 target these and other strategies.
“Federal revenue-raising proposals have included provisions to limit some of the estate planning tax benefits of these options,” Graziano said. “As a result, planners are taking a closer look at these sooner – while they’re still available and can be grandfathered in – rather than waiting until they may be less advantageous.”
State Estate Taxes Add to Planning Challenges
State estate tax laws add to the planning challenge, with many states imposing estate taxes on much smaller estates than under federal law, while others impose no estate tax at all.
While states have historically followed federal estate tax, many states retained or reinstated their estate taxes based on the expired state death tax credit from the pre-EGTRRA federal estate tax law as a way of holding onto tax revenues. States currently following pre-EGTRRA provisions include: Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Rhode Island and Vermont as well as the District of Columbia. However, Illinois “recoupled” to the federal estate tax law, but only with regard to the estates of persons dying in 2010 (the tax returned for the estates of decedents dying after December 31, 2010). Nebraska eliminated its additional estate tax for persons dying after 2006.
Effective January 1, 2012, Oregon becomes the fourth state to move completely away from the federal estate tax law and enact its own estate tax. Three other states – Connecticut, Ohio (until 2013) and Washington – have their own estate tax not tied to EGTRRA. Maine also will decouple from the federal law and enact its own estate tax effective in 2013.
Some states, including those that have their own estate taxes as well as those following a modified version of the federal law, now allow domestic partners to file joint tax returns. This allows partners to be recognized under their state’s estate tax laws and thereby enables the surviving spouse to avoid paying any taxes on the decedent’s estate. This is the case in Delaware, New Jersey, Rhode Island and Washington.
While the federal estate tax excludes $5.12 million, most states with estate tax laws tend to have far lower exclusions. The exceptions are Delaware and North Carolina, which follow the $5.12 million threshold.
“States are cash strapped, so many have an exclusion amount of $1 million or $2 million and are reluctant to raise the exclusion amounts,” said CCH Estate Planning Analyst James C. Walschlager, MA. He added that Illinois, however, did vote in 2011 to increase the Illinois estate tax deduction from $2 million to $3.5 million in 2012 and to $4 million in 2013.
In addition, there are now three states that will not have any estate tax. Kansas, Oklahoma and Arizona currently have no estate tax.
In addition to estate taxes, eight states also collect an inheritance tax. This is a tax on the portion of an estate received by an individual. It is different from an estate tax, which taxes an entire estate before it is distributed to individual parties. These states are Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee. Assets transferred to a spouse are exempt from the inheritance tax, and some states exempt assets transferred to children and close relatives.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Follow us now on Twitter @CCHMediaHelp. Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands.
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