Taxation & Estate Planning

25 Things You Need To Know About The New Estate Tax Laws: 21-25

By Joel A. Schoenmeyer

GIFT AND GST TAX

Some background: The estate tax and gift tax were designed to work hand in hand. After all, if there was no gift tax, then you could avoid estate taxes by giving away all of your property right before death. For many years, the estate and gift taxes were "unified." The idea was that the exemption amount (discussed previously) applied during life OR at death. For instance, in 2002 and 2003, the exemption amount was $1 million. That meant the first $1 million you gave away -- during life or at death -- was exempt from taxation. So, you could give 500K during life and 500K at death, or $1 million at death, and owe nothing.

Starting in 2004, the estate and gift taxes were no longer unified. There was a $1 million gift tax exemption amount from 2004-2009, but the estate tax exemption amount climbed during these years. In 2009, for instance, the gift tax exemption amount was still $1 million but the estate tax exemption amount was $3.5 million. So, if you gave away $2 million during your life, you would still owe gift tax.

21. The Act re-unifies the estate tax and the gift tax. The exemption amount is $5 million -- you can give that amount in any combination during life or upon death.

22. The taxes are also unified with the GST (Generation Skipping Transfer) tax, which is an added tax that applies to gifts to much younger individuals (like grandchildren).

23. One big concern relates to the fact that The Act applies only to 2011 and 2012: what if the exemption amount is dropped starting in 2013? Would people who utilize The Act to make big gifts in 2011 or 2012 be punished retroactively? For instance, let's say that I give away $5 million in 2011, and then in 2013 the exemption amount drops to $1 million. How will my 2011 gift be treated upon my subsequent death?

STATE ESTATE TAX

A little background: In most cases, in the "olden days," the federal government and the state where the decedent resided would divvy up the estate taxes. An estate could take a deduction on the federal estate tax return called the "state death tax credit," and many states had a "pick-up tax," an estate tax equal to that amount. So, if your ultimate estate tax bill was for $1 million, a portion of that (equal to the "state death tax credit") would go to your home state.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (which, among other things, ramped up the exemption amount from 2004 to 2009, and resulted in no federal estate tax in 2010) also lowered (and eventually phased out) the state death tax credit. This meant a smaller and smaller part of the estate tax pie was going to the states. In response, many states (including Illinois) got rid of their "pick-up tax" and instituted their own estate tax not tied to the state death tax credit. (That process was called "decoupling.")

24. The Act reinstitutes the state death tax credit.

25. You'll now want to figure out how your state's estate tax laws (if any) will function in this new climate. If your state decoupled, will they go back to a pick-up tax? I could delve into that issue at depth with respect to Illinois, but Hani Sarji already did so in this really good article.

Full post as published by Death and Taxes Blog on January 20, 2011 (boomark / email).