An unfortunate casualty of this year’s mid-term elections is the uncertainty regarding what awaits tax payers in the coming year.
You may not have heard of Dan Duncan, but rest assured the IRS has. Duncan was No. 30 on the Forbes Fortune 400 list in 2009 with an estimated net worth of $8 billion. On March 28, 2010, Duncan died. With the estate tax on hiatus for 2010, you can imagine the broad smiles spread across the faces of his heirs after their tears, given that much of what Duncan built may not end up being lost to estate taxes. But, even if you are not a billionaire, there is much to lament in this uncertainty.
First, let’s be clear on what actually is happening with the estate tax. Until 2009, the value of one’s estate protected from federal estate taxation had been rising, reaching $3.5 million last year. With proper planning, that meant an individual potentially could shield up to $3.5 million with married couples able to protect up to $7 million. The same legislation that established these limits abolished them altogether for tax year 2010, but allowed them to revert to $1 million in 2011.
So who does this really affect? Generally (I say generally, because personal tax situations are very unique), any individual with a net worth of greater than $1 million or married couples with net worth exceeding $2 million, could be affected. But, what does this mean for your situation, and what, if anything, should you do before the end of the year?
Gifting may allow you to reduce the value of your eventual estate by transferring assets to heirs now. Keep in mind that gift taxes may apply to any gift of more than $13,000 in value. But, consider if a married couple wanted to gift to one of the children who was married, each spouse might give $13,000 to the child and their spouse for a total of $52,000. For those with substantially larger estates, they might consider gifting this year beyond those limits, creating a gift tax liability taxed at 35 percent if they believe the estate tax will be reinstated with rates up to 55 percent.