This is a good article about end of year gifting.
The federal gift tax rate for gifts in 2010 is (just) 35%, which is really low compared to historical rates. Under current law, the rate increases to 55% on January 1, 2011. Accordingly, for taxpayers whose net worth is sufficiently high that they will likely be subject to estate tax regardless of any law changes, taxable gifts this year could be a really good planning tool. This is especially true for older clients or clients in poor health.
Of course, you should wait until the end of the year (read December 31) to make these gifts, because if you die before the end of year, then the gift tax paid will have been wasted.
Friday, October 8, 2010
Thursday, October 7, 2010
States are in Favor of the Estate Tax
As I stated in a previous post, I was at the Southern Federal Tax Institute in Atlanta last week, which has a wonderful two-day estate planning program. There were many interesting things said, but one of the things that caught my attention the most related to the reinstatement of the federal estate tax in 2011.
Prior to the Bush tax cuts, the federal estate tax code allowed each decedent a "state death tax credit," which was a credit against the decedent's federal estate tax liability. The purpose of the credit was to give taxpayers a credit for any amounts paid in state death taxes. (Although this was the purpose, the state death tax credit was a specific formula provided in the tax code and was not actually related in any real way to the amount of state death tax a decedent actually paid.)
Most states had a death tax (or inheritance tax or estate tax, etc.) equal to the state federal death tax credit. Accordingly, the state death tax credit really just provided the states with some of the federal estate tax revenue, and did not actually reduce the total estate tax owed by a decedent. For example, let's assume that a decedent owed $100 in federal estate taxes, not including the state death tax credit, and was entitled to a $20 state death tax credit. Without the state death credit, the decedent would owe $100 to the IRS. With the state death tax credit, the decedent would $80 to the IRS and $20 to the state where she died. So, in both scenarios, the decedent was out $100. The only thing that changed was where it went.
When the Bush tax cuts came in, the state death tax credit was repealed. This meant that the death tax revenue for many states went away as well. If the estate tax is reinstated next year as currently scheduled, the state death tax credit comes back too, which means that many states will start receiving estate tax revenue again.
I have always known that the return of the estate tax would benefit many states, but what I did not realize, and learned at SFTI, is that many states are actually lobbying Congress to allow reinstatement of the estate tax as currently scheduled.
Prior to the Bush tax cuts, the federal estate tax code allowed each decedent a "state death tax credit," which was a credit against the decedent's federal estate tax liability. The purpose of the credit was to give taxpayers a credit for any amounts paid in state death taxes. (Although this was the purpose, the state death tax credit was a specific formula provided in the tax code and was not actually related in any real way to the amount of state death tax a decedent actually paid.)
Most states had a death tax (or inheritance tax or estate tax, etc.) equal to the state federal death tax credit. Accordingly, the state death tax credit really just provided the states with some of the federal estate tax revenue, and did not actually reduce the total estate tax owed by a decedent. For example, let's assume that a decedent owed $100 in federal estate taxes, not including the state death tax credit, and was entitled to a $20 state death tax credit. Without the state death credit, the decedent would owe $100 to the IRS. With the state death tax credit, the decedent would $80 to the IRS and $20 to the state where she died. So, in both scenarios, the decedent was out $100. The only thing that changed was where it went.
When the Bush tax cuts came in, the state death tax credit was repealed. This meant that the death tax revenue for many states went away as well. If the estate tax is reinstated next year as currently scheduled, the state death tax credit comes back too, which means that many states will start receiving estate tax revenue again.
I have always known that the return of the estate tax would benefit many states, but what I did not realize, and learned at SFTI, is that many states are actually lobbying Congress to allow reinstatement of the estate tax as currently scheduled.
Wednesday, October 6, 2010
WTH Is Going on with the Estate Tax?
As most everyone knows by know, there is no federal estate tax this year. As part of the 2001 Bush tax cuts, the estate tax was gradually repealed starting in 2001 until complete repeal in 2010. Because of the Congressional budget rules (of which I will spare you), the Republicans did not have enough votes to make the repeal permanent. Instead, without further Congressional action, the estate tax is reinstated beginning next year. In addition, upon reinstatement, the federal estate tax exemption is only $1,000,000 per person (whereas it as $3,500,000 per person last year) and the top rate increases to 55%.
Most everyone thinks that we will have an estate tax next year, but that Congress will act and not allow the exemption to return to $1,000,000. (Of course, this time last year, I counseled clients that there was no way Congress would allow the estate tax to be repealed for a year. So, frankly, no one really knows.) But, the consensus also seems to be that it will be next year before Congress takes action. First, nothing will take place before next month's elections. Then, the universal belief is that the Republicans (who favor repeal) will make substantial gains in Congress this year. Because of this, the Republicans will likely be able to strike a better deal by waiting until the beginning of next year when all their new people are in office, rather than trying to pass some lame-duck legislation before the end of the year. Accordingly, it could be January, February or later before we get any Congressional action, and who knows, maybe nothing will happen.
Most everyone thinks that we will have an estate tax next year, but that Congress will act and not allow the exemption to return to $1,000,000. (Of course, this time last year, I counseled clients that there was no way Congress would allow the estate tax to be repealed for a year. So, frankly, no one really knows.) But, the consensus also seems to be that it will be next year before Congress takes action. First, nothing will take place before next month's elections. Then, the universal belief is that the Republicans (who favor repeal) will make substantial gains in Congress this year. Because of this, the Republicans will likely be able to strike a better deal by waiting until the beginning of next year when all their new people are in office, rather than trying to pass some lame-duck legislation before the end of the year. Accordingly, it could be January, February or later before we get any Congressional action, and who knows, maybe nothing will happen.
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