Understanding Estate Taxes in 2011 and 2012


Estate taxes and gift taxes were a little confusing for folks handling the estates of loved ones who passed away in 2010. Executors had a few options and had to figure out which options would best minimize taxes on the estate. As a California estate planner, I fielded numerous calls from clients who were unsure how the 2010 tax rules applied to their situation.

 Now that 2010 is past, the situation regarding estate and gift taxes is much more straight-forward and easier to understand. Let’s take a look at the tax rules for estates through the end of 2012:

First $5 Million Exempt from Estate Taxes and Gift Taxes

According to the 2010 Tax Relief Act, the first $5 million of value is exempt from any estate taxes or gift taxes, for the estates of anyone who passes away in 2011 or 2012.

However, it should be noted that this is $5 million total. If you give away $5 million before passing away, your heirs cannot then claim a $5 million exemption from estate taxes. If less than $5 million is given away prior to death ($3 million for example), then only the remaining exemption ($2 million) can be claimed against estate taxes.                                                                                     

The only time these exemptions can exceed $5 million is in the case of a surviving spouse. A surviving spouse can claim whatever portion of the deceased spouse’s exemption has not already been claimed. So, if the deceased spouse gave away $2 million to family members before death, the surviving spouse can claim the remaining exemption of $3 million, for a total of $8 million exemption from estate or gift taxes. If you are a surviving spouse, a qualified California estate planner can help you determine how much of your deceased spouse’s exemption can be applied to your estate.

Estate Taxes, Gift Taxes Unified at 35% Rate

Another change under the 2010 Tax Relief Act further simplifies estate taxes for the next two years by unifying the tax rate at 35%. That means you or your heirs will pay a flat 35% tax on the taxable lifetime value of your estate and gifts. Your California estate planner will help you determine how much tax to pay and which portions are paid as estate or gift taxes.

Tax Situation Returns to Pre-2001 Rules in 2013

Unfortunately, the 2010 Tax Relief Act was passed as a stop-gap measure at the end of 2009. The current exemption and tax rate is only effective through the end of 2012.

If Congress does not continue the 2010 Tax Relief Act or vote another tax law into effect before January 1, 2013, then the tax rules will revert back to rules effective prior to 2001. This means that the exemption for gift taxes and estate taxes will only be $1 million, and the unified tax rate will increase to 55%.

With rules changing every couple of years, planning to minimize estate taxes becomes difficult. Let’s hope Congress can put a viable, long-term law into effect for gift taxes and estate taxes very soon.

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