Even as wealthy married couples glom onto a new “portability” provision that shields some of the assets they intend to bequeath from estate taxes, many remain bewildered as the kaleidoscope of federal and state tax law continues to represent a moving target.
After a 2010 year that was free of federal estate taxes, Congress enacted a law last December that re-established an estate tax through 2013, while increasing to $5 million the threshold at which the Internal Revenue Service would exact estate tax.
After next year under current law, federal taxes revert back to their structure from 2001 ”“ a year that featured a 55 percent tax rate compared to today”™s 35 percent levy ”“ creating major uncertainty for those drawing up wills or revising them to maximize the amounts they can bequeath to heirs, according to attorneys with Stamford-based Cummings & Lockwood and other local law firms.
Complicating matters is the fact that Connecticut lowered its own exemption this year to $2 million, down from $3.5 million. That $1.5 million difference would result in a state tax of more than $120,000 if an individual used his full $5 million federal allotment, according to Cummings & Lockwood.
That exemption won Connecticut national attention this month after the Hartford Courant reported that a developer”™s estate sued the state, claiming the lower threshold enacted this year retroactive to January cost it some $100,000, which could have been avoided through advance planning.
Attorneys went back to the drawing books this year after Congress enacted the “portability” provision for couples, with the new law allowing any unused exemption not taken by the first spouse”™s estate to be transferred to the survivor and used for that person”™s estate, including for gifts in his lifetime.
The law is also applicable to small-business owners contemplating a bequeathal of their business to a spouse or children.
The IRS said it expects that most estates of people who are married will want to make the portability election, including people who are not required to file an estate-tax return for some other reason.
The first tax returns for estates eligible to make the portability election were due as early as Oct. 3, due to the estate-tax return being due nine months after the date of death coupled with the law being applicable to dates of death beginning in January. Estates unable to meet the deadline can request an automatic six-month filing extension. The IRS emphasized estates of those who died before 2011 are not eligible.
According to attorneys at Cummings & Lockwood, the next 14 months are a particularly opportune time to make gifts, against the possibility that all bets are off the table as of 2013 with regard to the 35 percent tax rate, the $5 million exemption and portability, among other features deemed favorable under current law.
Cummings & Lockwood is holding a free estate-tax seminar series beginning Oct. 26, with eight sessions scheduled through Nov. 9 in Greenwich, New Canaan, Stamford and Westport covering estate-planning fundamentals and opportunities for this year and next.
“The first reaction of many of our clients to the news of the increase in the gift-tax exemption to $5 million in 2011 and 2012 was a sense of urgency to take advantage of it out of fear that it would disappear in 2013,” Cummings & Lockwood attorneys wrote in a client note this year. “It is important to understand that such gifts may not necessarily save taxes or increase the total assets passing to such children during their parents”™ lifetimes and at their deaths. ”¦ Given the temporary nature of the increased exemptions and the way the estate tax appears to be coordinated with the gift tax under the current unified structure, what is tax-free now may be taxed later.”
