2010 Tax Relief Act: Estate Tax Update

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2010 Tax Relief Act:  Federal Estate Tax Provisions

On December 16, 2010 Congress passed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.   Section III of the bill is titled “Temporary Estate Tax Relief”.

Section III gives instructions on how estate representatives should calculate and pay estate taxes for decedents who die in the years 2010, 2011 or 2012.

IF YOU DIE IN THE YEAR 2011 OR 2012

The 2010 tax relief act provides:

  • The federal estate exemption allowance for a single person is $5 million.
  • Married couples can pass $10 million of assets to their heirs free of estate taxes by the use of a new estate tax form referred to as the Deceased Spouse Unused Exclusion Amount (DSUEA)
  • The maximum estate tax rate is 35%.

Q.    Why should married couples care about the Deceased Spouse Unclaimed Exclusions Amount form?

A   Before the 2010 Tax Relief Act created the DSUEA form, the only way a married couple could preserve the estate tax exemption allowance of the first spouse to die was to spend time and money in setting up an A/B trust.

The surviving spouse of someone who dies in the year 2011 or 2012 can now just file  Form 706 with the Internal Revenue Service and claim the right to the  deceased spouse unclaimed exclusion amount.   When the surviving spouse dies, his or her estate representative can combine the last spouse to die $5 million personal estate tax exemption allowance with the first spouse to die deceased spouse unused exclusion amount.

The ability to transfer the estate tax exemption to the surviving spouse is sometimes referred to as portability.  The net effect is it gives married couples the right to exclude $10 million of assets from federal estate taxes.

Q.   Can domestic partners take advantage of DSUEA?

A.   No.    The existing Defense of Marriage Act limits federal benefits to a traditional husband and wife.

Q.   Can the new DSUEA benefit help if a spouse died several years ago?

A.    No.   The ability to use the new DSUEA only applies to someone who dies after December 31, 2010.

Q.   Is portability automatic?

A.   No.   The surviving spouse or someone responsible for settling the estate of the deceased spouse MUST file Form 706 estate tax return with the IRS and claim the deceased spouse unused exclusion amount, even if no tax is due.    The 706 estate tax return must be filed nine months after death but you can apply for a 6 month extension.  The IRS is expected to create a short Form 706 to make it easier to file and claim the DSUEA.

Q.   What if the Form 706 is not filed?

A.   If the estate of the deceased spouse does not file Form 706, the surviving spouse loses the right to portability.

Q.   Should a surviving spouse file Form 706 if the estate is not subject to estate taxes?

A.    Yes.   If the executor doesn’t file the Form 706 estate tax return or misses the filing deadline, the surviving spouse loses the right to portability.  Spouses should file Form 706 even if they’re not wealthy today.   Who knows the future.   The surviving spouse might win the lottery!

Q.    Is the amount of the deceased spouse exclusion amount adjusted for inflation?

A.  No.

Q.   Will the amount of the individual $5 million tax exemption allowance be adjusted for inflation?

A.  Yes.

Q.   What happens if the surviving spouse remarries?

A.    If a surviving spouse remarries, the surviving spouse must use the DSUEA of the new husband, even if the unused exemption of the new husband is less than the unused exemption of a prior husband.

Q.    Does a married couple still need an A/B  trust?

A.   Married couples no longer need an A/B trust to preserve the federal estate tax exemption of the first spouse to die.    Since the DSUEA is not adjusted for inflation, an A/B trust may still be useful in protecting the appreciation of the first spouse to die assets placed in Trust B.

An A/B trust may also be beneficial if someone wants to protect assets from creditors or protect an inheritance for children from a prior marriage.

2010 Portability Examples:

Example 1:   DSUEA not available.

John and Mary owned assets with a taxable value of $8 million.  John died unexpectedly in 2010 and had not created a will or an A/B trust.   Mary, the surviving spouse, inherited John’s share of the marital assets.  Mary could not file and claim a DSUEA because portability was not available in the year 2010.

Mary dies in 2012.   Estate taxes will be due on $3 million, the value of the estate exceeding Mary’s $5 million estate tax exemption allowance.

Example 2:   DSUEA is available.

John and Mary owned assets with a taxable value of $8 million.  John died unexpectedly in 2010 and had not created a will or an A/B trust.   Mary, the surviving spouse, inherited John’s share of the marital assets.  Mary filed a timely Form 706 estate tax return and elected to claim John’s unused exemption amount.

Mary dies in 2012.   No estate taxes are due, as Mary’s estate excluded $10 million of assets by combining Mary’s $5 million exemption allowance with John’s $5 million exemption allowance.

Example 3:   Surviving spouse remarries.

John and Mary owned assets with a taxable value of $8 million.  John died January 1, 2011.  Mary, the surviving spouse filed a timely Form 706 estate tax return and elected to claim John’s unused $4 million exemption amount.

Mary marries Jim in December 2011.

Jim dies in June, 2012.   Mary files a Form 706 claiming a $2 million DSUEA for Jim.

Mary dies in December, 2012.   Mary’s estate can use and combine Mary’s $5 million estate tax exemption and Jim’s $2 million DSUEA.

If  Mary remarries before she dies, the DSUEA of a prior spouse is replaced with the exemption allowance of the most recent spouse.

Example 4:  A/B trust present

John and Mary owned assets with a taxable value of $10 million.  John died in 2010 and left instructions to place his $5 million share of the marital assets in Trust “B”.   One of the assets John owned was shares in a start up valued at $2 million when he died.

When Mary dies in 2012, the company John had invested in had been sold and the value of the shares in Trust “B” is now $8 million.     Because the assets in Trust “B” are no longer considered assets owned by Mary, Mary’s estate does not need to include the value of the assets in Trust “B” as part of Mary’s taxable estate because the assets are owned by Trust “B”.

The use of an A/B trust rather than the use of a DSUEA form protects any appreciation in the assets of the first spouse to die.

IF YOU DIED IN THE YEAR 2010

There are two different estate tax laws governing the estates of someone who died in the year 2010.

2001 Economic Growth and Tax Reconciliation Act (EGTRRA)

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). The EGTRRA contains estate tax laws governing the estates of someone who died in the years 2002 through 2010.

In 2010, EGTRAA eliminated the estate tax.   The estate did not need to calculate or pay any estate tax.   As such, there was no 2010 estate tax rate or 2010 estate tax exemption allowance.   No estate tax was paid before distributing assets to the beneficiaries.

Since the estate was no longer responsible for paying taxes before distributing assets to the beneficiaries, EGTRRA changed how beneficiaries calculate the tax basis of inherited assets.

Prior to 2010, the tax basis for beneficiaries was a “stepped up basis”.  The step up in basis establishes the tax basis for beneficiaries as the fair market value of the asset on the date of death of the decedent.

In the year 2010, EGTRAA changed the tax basis for beneficiaries to a carryover basis.   The carryover basis establishes the tax basis for beneficiaries as the original cost basis of the decedent plus qualified improvements.    Each estate can exempt $1.3 million of gains from the carryover basis rule.  Another $3 million exemption applies to assets inherited from a spouse.  In order to comply with the new carryover basis rules, executors and beneficiaries need to document and report the sale of inherited assets to the Internal Revenue Service, using special forms.

2010  Tax Relief Act:

The 2010 Tax Relief Act created a $5 million federal estate tax exemption allowance and set the maximum estate tax rate at 35%, retroactive to January 1, 2010.   The beneficiary tax basis is a step up in basis value.

Which law governs the estate of someone who dies in 2010: EGTRRA?   Or the 2010 Tax Relief Act?

The 2010 Tax Relief Act gives the estate of someone who died in 2010 the right to choose which law to use.

The language in the 2010 Tax Relief law assumes the estate of someone who dies in the year 2010 will be subject to an estate tax and the tax basis for beneficiaries will be a step up in basis.    Since the 2010 tax exemption allowance is $5 million, very few estates will actually need to file and pay estate taxes.   If estate taxes are due, the maximum tax rate is 35%.   No action is required by the estate to make this election.

If the estate elects to not pay any estate taxes and use the carryover tax basis for beneficiaries, the estate representative must file special forms with the Internal Revenue Service stating such intent.   Once this election is made by the estate representative, any change must be approved by the Secretary of Treasury or the Commissioner of  the Internal Revenue Service.  The form for making this election is not available today.

Example:   Beneficiary Carryover Tax Basis.

When her father died, Mary inherited the family residence.   On the day her father died, the fair market value of the house was $500,000.   Mary’s father purchased the house 20 years ago for $200,000.

Mary sold the house for $500,000.  Mary’s tax basis was $200,000, the original cost to her father.  Mary had to report and pay capital gains tax on $300,000.

The estate was not subject to any estate tax calculations.   There was no need for the estate representative to calculate or pay estate taxes before transferring the title of the real estate to Mary.

Mary’s tax basis remained the same as the decedent.  The estate representative elected to give other assets of the decedents the right to exempt $1.3 million of gains from the carryover basis rule.

Example 2:  Beneficiary Step Up In Value Tax Basis.

When her father died, Mary inherited the family residence.   On the day her father died, the fair market value of the house was $500,000.  Mary’s father purchased the house 20 years for $200,000.

Mary sold the house for $500,000.  Mary’s tax basis was $500,000, as the tax value was stepped up to the fair market value on the date of death of Mary’s father.  Mary reported a capital gain of zero dollars and owed no taxes.

The estate representative calculated and paid any estate taxes due if estate taxes were due; the estate paid the taxes before distributing inherited assets to Mary and other beneficiaries.

WHAT IF YOU DIE AFTER JANUARY 1, 2013

The recent 2010 Tax Relief Act temporarily extended the temporary reduction in estate taxes prescribed by EGTRRA.   The current estate tax laws expire on December 31, 2012 and revert back to the tax laws in existence in the year 2001.

Don’t let the new $5 million estate tax exemption allowance and the Deceased Spouse Unclaimed Exclusion amount fool you about the importance of planning for estate taxes.    State estate taxes and inheritance taxes did not go away…and they don’t provide generous exemptions or portability.   It is also unclear what will happen with any unused deceased spouse exclusion amounts after 2012.

SUMMARY OF ESTATE TAX LAWS:  2001 through 2013.

Year Personal Estate Tax Exemption Allowance Top Estate Tax Rate Deceased Spouse Unused Exclusion amount Tax Basis Applicable Tax Law
2001 $675,000 55% No Step Up In Basis Taxpayer Relief Act of 1997
2002 $1,000,000 50% No Step Up In Basis EGTRRA
2003 $1,000,000 49% No Step Up In Basis EGTRRA
2004 $1,500,000 48% No Step Up In Basis EGTRRA
2005 $1,500,000 47% No Step Up In Basis EGTRRA
2006 $2,000,000 46% No Step Up In Basis EGTRRA
2007 $2,000,000 45% No Step Up In Basis EGTRRA
2008 $2,000,000 45% No Step Up in basis EGTRRA
2009 $3,500,000 45% No Step Up In basis EGTRRA
2010 $0 0% No No Step up in Basis EGTRRA
OR OR OR OR OR
$5,000,000 35% No Step Up In Basis TTRA2010
2011 $5,000,000 35% Yes Step Up In Basis TTRA2010
2012 $5,000,000 35% Yes Step Up In Basis TTRA2010
2013 $1,000,000 55% No Step Up In Basis Taxpayer Relief Act of 1997

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Facebook.com/healthcare.gov and Long Term Care

The Health and Human Service Department has announced the launch of HealthCare.gov on Facebook.

If you visit healthcare.gov, you will find several tools that can help consumers make educated choices about their medical care.

One of the tools is titled “Nursing Home Compare”.     It provides a list of U.S. nursing homes which includes demographics (location and type of facility) and nursing home ratings, which include health inspection reports, staffing data and quality measures.

Another tool is called “Home Health Compare”.   The Home Health Compare tool can help you compare the quality of care that home healthcare agencies provides.

If someone you know needs help with long term care,  this information may be very useful.

This is also a go to site if you want to find more facts about ObamaCare.

You can join Healthcare.gov on Facebook at http://www.facebook.com/healthcare.gov.

Donate your body to science and someone may profit from your death!

Many people leave directions on how they would like their body to be disposed of.  Before making a final decision, they may consider burial or cremation.  Another option they may think about is the possibility of donating their body to medical science.

There are many medical schools that would love the gift of a body that can be used to help students study human anatomy. And there are non-profit organizations that act as clearing houses for groups of those schools.  For example, in Florida, the Anatomical Board of the State of Florida office in Gainesville, Florida (800-628-2594) handles all of the “donations” of bodies to all the medical schools in that state.  And there is a web site, maintained by  the State of Florida Anatomical Board  http://www.med.ufl.edu/anatbd/usprograms.html,  which has a comprehensive list of medical schools across the country that are interested in receiving cadaevars. 

But beware.  Over the last several years, several for-profit companies have been formed that take a body and sell it, or parts of it, for a large profit….often more than $100,000 – $150,000! 

If you are considering donating your body, think about this.  Do you want someone to make money off of your death – money that will not go to your family but to a faceless corporation.  If the answer is no, check out the organization carefully before you sign any paperwork.

Bio Cremation bill passed in California

Recently we wrote about a new, green form of cremation – bio cremation from resomation.   On Thursday, May 6th the California State Assembly unanimously approved a bill which makes this process legal in California. 

In 2008, more than 45% of the deceased in California were cremated.  With that large a percentage choosing cremation, it’s good to know that there will soon be another, more environmentally safe alternative available. 

Because the equipment for this process is quite expensive, it is impossible to predict how quickly bio cremation will come to a funeral home near you.  However, one mortuary in Corona has already voiced interest in using this process and more will definitely follow now that it’s legal.

Bio Cremation – a new, green form of cremation

This week the California legislature is voting on a bill that will make bio cremation another legal way to dispose of human remains; it will provide an eco-friendlier alternative to the current choices – burial or cremation.

What makes bio cremation via resomation different? 

The current alternatives – traditional cremation and burial pose threats to the environment.

Cremation uses fossil fuels which are regulated by environmental officials and which have the potential to add to pollution because of their green house gas emissions.  Burial poses another environmental threat, primarily because of the chemicals such as formaldehyde that are used in embalming fluids; formaldehyde is a toxic chemical that eventually leaks into the ground as the body decomposes.

Bio cremation via resomation, on the other hand, does not use anything toxic or harmful to the environment.  According to a representative of Matthews International, exclusive distributor of bio cremation equipment for the United States, this new option uses a process called alkaline hydrolysis.  This process reduces a body to dry bone residue which can be buried in a cemetery or returned to the family in an urn just like the currently available options.  In case you’ve never heard of alkaline hydrolysis, it’s basically the same natural process that occurs in our small intestines to aid digestion of foods after we eat.  But for bio cremation it’s done in a big stainless steel cylinder and uses 95% water in an alkaline solution.

What does bio cremation cost?

In the short run, the cost to the consumer should be no more than $300 – $500 higher than that of traditional cremation, a small premium to pay to better protect our environment.  This premium is necessitated by the high initial investment that will need to be made by crematoriums, etc. to purchase the necessary equipment. 

Where is the process legal?

Although the bio cremation process has been legal in Europe for awhile, it is just gaining approval in the United States.

Florida was the first state to legalize this process, followed closely by Maine and Minnesota.  It is anticipated that the California legislature will approve bio cremation this week.  And approval by legislatures in Colorado, Nebraska, Arizona and Washington State is expected soon.

Adoption will be slower in other states, due in part to the fact that many of their legislatures don’t meet again until 2011.

What do consumers think?

Consumer testing of the concept has been very positive with some people commenting that they are pleased that there is finally a funeral service offering that is relevant to today.