A long standing issue that required extensive predeath planning, has been resolved with the IRS’s recent guidance on an estate tax law passed by Congress. Understanding this new policy can save wealthy families millions in taxes for their heirs.
The prior estate tax exemption policy for couples
In case you don’t recall, the 2012 lifetime estate tax exemption allows a deceased person to transfer property including life insurance benefits to beneficiaries tax-free, up to $5.12 million and $10.24 million, if married. Under the old regime, if one spouse passed away and left their assets to the surviving spouse (without a trust), the surviving spouse would only be able to pass along a $5.12 million estate tax exemption to their heirs when he or she passes away. Essentially, the estate tax exemption of the first spouse would be lost at death and could not be transferred to the surviving spouse’s estate when they die. This is a big difference if the estate is valued at $9 million, since $3.88 million would be taxable under the old policy. This translates to $2.1 million in additional taxes, assuming a 55% estate tax rate.
Utilizing the estate tax exemption to its fullest
The recent guidance provided by the IRS allows far greater flexibility and tax savings for estate planning. Specifically, if an estate tax return is filed soon after the first spouse passes away, which usually needs to be within 9 months of death, that spouse’s estate tax exemption is preserved and can be utilized when the surviving spouse eventually passes away. For instance, if a husband passes away and gives everything to his spouse, the estate tax exemption will be transferred to the surviving spouse’s estate. When she dies, her heirs will not be taxed on the first $10.24 million. This new policy effectively reduces the need for costly estate planning and trusts.
What if my assets are much less than $5 million?
You may think that you shouldn’t be concerned with this recent policy change if your wealth is well below $5 million today. However, you never know what will happen in the future as a surviving spouse can marry a wealthy wife/husband or experience significant financial success. Also, don’t forget that life insurance policies are included in an estate, which can be worth millions.
What if estate taxes change in the future?
It’s true that in 2013 estate tax exemptions are scheduled to revert to 2001 levels, in which wealth passed to beneficiaries that exceeds $1 million, will be taxed at 55%. However, that may not necessarily happen and there’s no reason not to file an estate tax return to preserve the exemption for future tax benefits.
More Questions? Ask your estate planning tax questions online.
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