Category Archives: Inheritance tax

Do I still need a trust with the new estate tax law?

Inheritance tax, Living Trusts
There were big changes in the inheritance tax laws recently. For the most part, the changes affect only the super-rich (estates of over $5 million).
But, a number of clients have come in for living trust review appointments lately wanting to know if they should get rid of their trust because of the changes in the estate tax laws. My policy always has been to meet with existing clients annually for  a free review of their trust. This encourages clients to come in (since they know they won’t get a $300 bill) and it helps keep trusts up to date and properly funded.

Several clients have asked if they should just ditch their trust due to the fact that the estate tax doesn’t start until $5 million in assets. The short answer: Keep the trust.

Here’s why:

1. Avoiding Probate. Revocable living trusts avoid probate. The filing fees and other costs for a Cook County probate are now around $700.00 and attorney’s fees will be about $2000.00. Clients don’t like this and can sidestep these costs by using a trust.

2. Estate tax limits change every five minutes and will soon go back to $1 million. For 2011 and 2012, the estate tax exemption amount is $5 million. But, this will change again in 2013 back to $1 million. Living trusts for married couples often use a formula that sets up  A/B  or family/marital trusts upon the first spouse’s death. The purpose of this is to avoid estate tax on the amount in the family trust of the first spouse to die. I think it’s best to keep your A/B trust intact if you are a married couple since you will need it when the amount clicks back to $1 million in 2013. The A/B trust protects the surviving spouse’s assets from creditors and insulates the assets in the event of remarriage.

3. Portability won’t last. Under the new law, married couples won’t even need A/B trusts because of the new concept called “portability.” This means if one spouse dies without a trust, the surviving spouse can file an inheritance tax return for the deceased spouse and claim the funds in the deceased spouse’s name as exempt from inheritance tax, even if the deceased spouse did not have an A/B trust. Wow, confusing, huh? The problem with this: It forces the survivor to pay to file an inheritance tax return (not cheap) on the first death and both spouses must die by the end of 2012 for it to “work.” And the clients still has to find a way to avoid probate on all of their assets. So it’s crazy for a married couple to get rid of their trusts because of portability.

For a nice summary of the many changes brought by the estate tax law, please read a series of  posts by a Chicago lawyer that cover in detail and with clarity the many changes to the estate tax laws.

Here are a few that you should be aware of :

1. Illinois tax kicks in at $2 million. The Illinois inheritance tax used to run parallel with the federal tax. Not any more. If you have a large estate, the best solution to this problem is to buy a  foreclosed condo in Florida and become a Florida resident since it has no state inheritance tax or state income tax.

2. Gifting can go up to $5 million lifetime. It used to be that the lifetime limit for gifting was $1 million. Now it’s $5 million, which is sweet, especially if you are the progeny of a rich dude.

So don’t ditch your living trust, just be sure that it says what you want it to say and that it’s properly funded with life insurance, real estate and the other fruits of your labor.

Estate tax vanishes Jan 1: But watch out for capital gains tax

Carry-over basis, Inheritance tax

If you thought inheritance taxes were complicated before, just wait for January 1.

The inheritance tax is abolished starting January 1. But it only stays abolished until December 31, 2010. On January 1, 2011, the old inheritance tax system returns, except that the amount that is free of inheritance tax changes to $1 million per person. Make sense? Of course not.

There is a new wrinkle that makes it all even more confusing. It’s this: Under the “old” system that expires December 31, 2009 and the new system that starts January 1, 2011, assets that the deceased owned received a “stepped-up basis.” This  means that the value of an asset is reset to its value on the deceased’s date of death. For example, if a client bought a house in 1980 for $100,000 then died in 2009 when the house was worth $300,000, and the house was sold after the deceased’s death, so no capital gains tax was due when the asset was sold because the “basis” or cost of the house was increased to $300,000. This applied to all property owned by the deceased.

Well, the stepped-up basis rules all change on January 1, 2010. Now, “stepped-up basis” is replaced by the term “carry-over basis.” This means that the basis of the deceased property owner carries over to the heirs and is not stepped-up (but of course there are exceptions, naturally).  If the asset is sold, capital gains tax must be paid by the heirs.

The new rules on carry-over basis are:

  1. $1.3 million or less in property still gets a stepped up basis.
  2. Any amount inherited over $1.3 million does not get a stepped-up basis. If this property is sold, capital gains tax will be paid by the heirs on the gain.
  3. An additional $3 million can be left to a surviving spouse and will get a stepped-up basis.

Complicating matters even more, Illinois decoupled from the federal inheritance tax system for a few years. This made is possible for large estates of over $2 million to pay inheritance tax to Illinois, but not to the U.S.  Thankfully,  for 2010, there is no Illinois inheritance tax to worry about.

What to make of all this? It is wise to review your will or trust with your attorney to address these complicated and ridiculous rules to be sure that you don’t call into a carry-over basis trap.