1. Stop worrying about the federal estate tax. In 2009, only 33,515 federal estate tax returns were filed nationwide. Nearly all of those estates filing returns were worth $2 million or more, and only 14,713 of those returns showed a net federal estate tax due. In filing year 2009 (when the top estate tax rate was 45 percent), only 391 federal estate tax returns were filed for deceased Indiana residents, and only 126 of those Indiana returns showed a net federal estate tax due. For persons dying in 2011 and 2012, when the estate tax lifetime exclusion amount is $5 million per person and the top estate tax rate is 35 percent, the number of estates that must file federal estate tax returns is expected to drop by 44 to 49 percent compared to 2009 levels, and the amount of federal estate tax revenue is expected to decrease by almost 39 percent. This means that in each of these years 2011 and 2012, only about 61 Indiana residents’ estates will be filing a federal estate tax return showing a net tax due.
2011 and 2012 are great years in which to do basic or updated estate planning; to focus on the practical issues (Who should get what after I die, and when, and with what restrictions or conditions?); and to view estate and inheritance taxes as merely a cost to be considered and minimized. For most people, death tax issues should not “drive” the planning decisions.
2. For married couples, a “portable” lifetime exclusion. Under prior law, a married person could "waste" part or all of the lifetime exclusion by (for example) leaving all assets outright at death to his or her surviving spouse, which potentially exposes all of those assets to the estate tax later when the surviving spouse dies. The 2010 Tax Relief Act now allows a surviving spouse to increase his or her lifetime exclusion amount ($5 million in 2011-2012) by the unused lifetime exclusion of his or her last spouse who has died. The surviving spouse can use the increased exclusion amount to shelter gifts from the gift tax and to shelter assets passing at death from the estate tax. “Portability” can make it easier for married couples to avoid wasting their lifetime exclusions, no matter what their estate planning documents say and no matter which spouse dies first.-The last-to-die spouse cannot use the unused lifetime exclusion from any deceased spouse other than the immediately preceding one, and cannot use the unused exclusion of a deceased spouse's other spouse from a previous marriage. These new rules could become more useful if Congress extends them, and in its proposed federal budget for the fiscal year beginning October 1, 2011, the Obama Administration has proposed to extend portability into 2013 and beyond. However, as the portability rules are now written, they only apply if both members of a married couple die in 2011 or 2012.
3. Opportunities for tax-free gifts. If you made “taxable” gifts totaling $1 million in 2010 or prior years, then you had used up your $1 million lifetime gift exclusion. However, on January 1, 2011, the 2010 Tax Relief Act gave you an extra $4 million lifetime exclusion, which you can use to shelter assets from the estate tax after your death or to make additional gifts at a zero gift tax cost. Under current law, this extra $4 million exclusion amount and the 35-percent gift tax rate are available only through 2012. If you have surplus wealth, 2011-2012 is an excellent time to make gifts on a tax-free basis even after you use up your $13,000 annual exclusions.
4. Make a “charitable rollover distribution” of up to $100,000 from your IRA to a charity. The 2010 Tax Relief Act has extended this technique through December 31, 2011. If you are at least 70½ years old, you can authorize a distribution directly from your regular IRA to one or more tax-exempt charitable organizations and can exclude up to $100,000 of the distribution from your gross income. This “charitable IRA rollover” exclusion is available even if you don’t itemize your deductions, or even if you have already maximized your regular charitable contribution deductions for the year, because it excludes the IRA distribution from your reportable income. The $100,000 exclusion is not available for IRA distributions to donor-advised funds and to most types of private foundations, but most other 501(c)(3) charities can receive direct IRA distributions qualifying for the exclusion.
Jeffrey S. Dible, Frost Brown Todd, LLC, concentrates his practice in estate planning, taxation and general business law. He can be contacted at firstname.lastname@example.org.