By M. Kotch

In an Otrib article published earlier this year, we mentioned a change in estate taxes for the year 2010.  If you find yourself with more questions than answers, even after in-depth reading, you’re not alone. Because the subject is complex, we’ve highlighted some important points regarding the state of estate taxes in 2010.

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Q: How are estate taxes different in 2010 than in any other year?
A: When congress passed the revenue act in 1916, it included two new taxes: income and estate. It was overhauled a few times, but the overhaul of 1976 brought us to the modern system of estate taxation (one which grouped gift and estate taxes into one lump exemption on your tax form). In 2010, the House of Representatives acted to renew the estate tax, but because the Senate failed to also renew, it will be applied as follows: unlimited gift, estate and GST exemptions and a tax rate of 35%.

Q: What else has been affected?
A: Assets left to grandchildren are no longer subject to “generation-skipping tax”, also known as GST.

Q: Will the estate tax resume in 2011?
A: Whether or not it will be extended in 2011 and renewed at the same rate and exemption is still unknown.  If congress does not take action, the estate tax will be reintroduced at the same rate as ten years ago: 55% instead of 45% that was applied for the past decade, and a $1 million instead of a $3.5 million tax exemption.

Q: Does this change only affect the wealthy or the middle class as well?
A: This change in estate taxes will probably affect the upper middle class in addition to the wealthy. According to the New York Times, a change in tax exemptions may affect 70,000 people this year versus 5,500 people last year.

Q: How will this change in estate taxes affect beneficiaries?
A: Until this year, estates (or assets) were taxed based on their value at the time of death. However, assets, including homes and stocks, must now be taxed based on their original value—not the current value. This may prove very time-consuming and complicated information to gather, especially when it applies to stocks and assets that have changed hands many times over years or even decades.

Q: What steps can I for the sake of my heirs?
A: Begin by sitting down with your estate attorney or financial planner to go over your documents (last will, power of attorney, etc.) If you have not chosen someone to act with power of attorney do so.  Convert existing assets into tax-exempt ones (a ROTH account into a ROTH IRA, for example) and consider a trust fund for your beneficiaries.

Note: The article is intended for general information purposes only. Consult your attorney or financial expert before making the estate planning decisions that are right for you.

This entry was posted on Tuesday, February 2nd, 2010 at 6:05 pm and is filed under Pre-need. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.