By Steven Schwartz, Synergy Wealth Partners, LLP, www.synergywealthpartners.com

Taxes Still a Certainty but New Legislation May Help Ease the Sting

While Ben Franklin may have been correct when he said nothing in this world is certain but death and taxes, new legislation is taking some of the sting out of estate taxes. On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act), which offers significant tax benefits to individuals and their estates.

Here’s what taxpayers and their families should know now, as the tax limits and exemptions established in the Act expire at the end of 2012.

• Estate tax exemption rises to $5 million

The Act sets the estate tax exemption amount at $5 million per person or $10 million for married couples. This means individuals can pass $5 million to their heirs tax-free. The $5 million exemption amount will be indexed for inflation after December 31, 2011.

• Unused estate tax exemption amount is portable

The executor of an estate may transfer a deceased individual’s unused estate tax exemption amount to the individual’s spouse. The spouse may then combine the unused amount with his or her own $5 million estate tax exemption.

• Maximum estate tax rate is 35 percent
  

For estates greater than $5 million, the maximum estate tax rate is 35 percent. This is significantly lower than the 55 percent assessed on estates in 2001.

• Entire estate tax exemption may be applied to lifetime gifts

The Act allows individuals to apply their entire estate tax exemption amount to lifetime gifts. In 2009, a donor could apply only $1 million of the $3.5 million estate tax exemption to gifts made during the donor’s lifetime. In 2011, a donor will be able to apply the entire $5 million exemption amount to lifetime gifts.

• Estate tax and gift tax are reunited

The Act also sets both the maximum gift tax rate (for amounts above the estate tax exemption) and the estate tax rate at 35 percent.

• IRA charitable contribution limit extended

The Act extends the ability for individuals to contribute up to $100,000 tax-free from an IRA to charity for 2010 and 2011. It also allows charitable donations made from an IRA in January 2011 to count toward the 2010 minimum distribution requirement.

With certainty (for at least the next two years), an opportunity exists for high net worth individuals to review their estate and financial plans. So while Ben Franklin’s belief that nothing is certain but death and taxes remains true today, taking advantage of the tax limits and exemptions established in the Act might help soften the blow.