Estate Tax Changes for 2011: What to Expect and How to Plan

September 30, 2010

Between the unanticipated expiration of the federal estate tax in 2010 and its abrupt resumption in 2011, many clients are revisiting their estate plans to take into account all implications of the legal fluctuations over recent years. A decade of incremental benefits for million-dollar-plus estates is scheduled to come to a screeching halt at the end of the year.

Congress began to pare back the estate tax in 2001 by increasing the amount of an estate's value that was exempted from taxation. In 2001, that figure stood at $1 million, and by 2009 it had risen to $3.5 million. The tax is scheduled to return to 2001 figures on January 1, 2011, authorizing a levy of as much as 55% on decedent estates valued at more than $1 million.

Congressional gridlock that allowed the tax to expire in 2010 suggests that any last minute effort to reduce the impact of its reinstatement is unlikely to succeed. But for the beneficiaries of decedents who passed away in 2010, the absence of an estate tax will likely have a tremendous impact -- some estimates suggest an extra $500 million will be passed on to the beneficiaries of George Steinbrenner's $1.15 billion estate.

In 2011, reinstatement of the $1 million exemption will have a significant impact on the legacies passed on within many families, particularly if the testator owned real estate that has appreciated significantly over recent decades. "You take a home, an IRA or 401(k) retirement account, some other savings and you get to $1 million pretty easily," Richard Behrendt, a former IRS attorney, recently told USA Today.

Tax Expiration: Not a Benefit to Everyone

While it would seem like the lapsed estate tax provided a clear benefit, some smaller estates that would not have been subject to the tax in 2009 lost the statutory benefit of capital gains valuation provisions when the complex set of federal laws expired. For some estates valued below the 2009 exemption level, taxpayers were allowed to estimate property gains using current valuations as the basis.

This anomaly may have a political solution: one option currently being discussed in Washington is allowing taxpayers to opt for application of the tax to 2010 transactions, if such a calculation would work to their benefit. Florida is among several states that have taken on similar issues by allowing judges to take the sudden absence of the estate tax into account when construing wills and interpreting inheritance formulas.

Planning for Estates in Excess of $1 Million

The recent rapid changes in the American estate tax scheme have real implications for people who have already made estate planning choices based on the previous exemption level. In particular, individuals who previously estimated their estate value at between $1 million and $3.5 million should revisit the various strategies that met their needs in 2009 or earlier.

But the inquiry should not stop there. One obvious factor that all individuals should consider is whether the cumulative value of their assets is still relevant. Because the value of businesses, real estate and financial assets have faced serious challenges in the past several years, a fresh wealth assessment makes sense.

Consulting With an Estate Planning Attorney to Put Your Legacy in Perspective

Whether a person has yet to finalize an estate plan or feels the need to revisit its current effectiveness, a conversation with a probate lawyer can reveal legal strategies to pass a hard-earned legacy along to the next generation. Experienced legal counsel should also be able to help you understand the latest legal developments involving wills, trusts, guardianships, living wills and powers of attorney. A law firm with litigation experience can also stand by your side for any disputes involving a parent's or other benefactor's will, or help you manage the complexities of the probate process.

Meanwhile, the diverse state and federal laws that govern the way we pass along our accumulated assets to our survivors will continue to occasionally serve as a political football. As in all aspects of life, changes to estate planning laws are inevitable, and sometimes the changes come full circle. By taking the time to update all relevant aspects of a comprehensive estate plan, clients can rest assured that the first moments of 2011 will not ring with unexpected adverse surprises.

Article provided by Bryant Law Firm
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