Monday, January 10, 2011

Estate Tax Changes for 2011-2012 (& 2010)

Apparently Congress was following my posts and decided to wait until the last minute to make changes to the federal estate tax system. Three significant changes to be aware of from the TRA 2010:

Exemption Amount Change - While $1 million was scheduled for the exemption amount for 2011 the new act implements a $5 million exemption per person. Thus, a married couple could pass on $10 million without worrying about federal estate taxes. With these type of numbers, there will be very few estates that will have any federal estate liability. In addition, for those individuals that passed in 2010, their estate can choose either the old 2010 "no estate tax - carryover basis" rules or the new "$5 million exemption - stepped-up basis".
Portability - In somewhat of a surprise, one of the bigger changes was the addition of the idea of portability. The idea is essentially if your spouse doesn't "utilize" their exemption amount, the surviving spouse can take advantage at their death. Previously, unless the assets were properly titled, it was possible that the first-to-die spouse may not use their exemption and it is lost forever for no one to use. Portability concept avoids that situation. However, it creates different "issues" that arise out of second marriage situations.
Gift Tax Exemption - The lifetime gift exemption was matched to the federal exemption amount as well ($5 million). Thus lifetime and/or death transfers up to $5 million are permitted.

However, while Congress did make some changes, at the last minute, it is only temporary as the provisions will expire December 31, 2012. I suspect I'll have to re-post my comments from last month about the "what if" scenario, which include the scheduled return of a $1 million exemption. On the night of the BCS national football championship, it is appropriate to describe this move by Congress as a "punt".

15 comments:

Jay said...

Would it be wise to move money using a Power of Attorney, prior to the death of a parent, in order to keep money out of probate?

The money could be moved to a POD account, then withdrawn after death, and then "gifted" to siblings, keeping it out of the probate process. If I understand the laws, a married couple could gift up to $26k to each sibling tax free.

Also, which state will heirs be responsible for inheritance tax if the deceased estate is in Iowa, but all heirs live in Nebraska? or will both states charge some type of tax on inheritance.

Matthew Gardner said...

Jay-

You could move money prior to a parents death in this fashion. "Is it wise?" you ask. Depends on the situation. If I understand your question, you are putting the funds in a POD account, then making a gift after the account transfers to the beneficiary at death. If there are any creditors of the beneficiary, they could garnish those funds first. Or maybe the beneficiary changes their mind about the gift to the siblings.

For your second question, the estate of the decedent will be subject to the tax. Actually, in Iowa, the beneficiary is taxed, but the executor is responsible for collecting the tax and paying it to the state.

elizabeth said...

Concerning a house and some farm land, what is the best way to pass it to my 2 children, paying the least amount of extra taxes. House worth $160,000.00 & land worth $625000.00

Anonymous said...

What is the best way to leave my home ($160,000.) and farm land ($625000.) to my 2 children to avoid the least amount of taxes?

Matthew Gardner said...

Anonymous-

It depends on a few things about saving taxes. Assuming those represent most of your estate, you won't have to worry about federal estate taxes. If you are an Iowa resident, leaving it to your children doesn't create any Iowa inheritance taxes. Thus, "death taxes" would not be an issue. If your estate consists of much more than these properties, you may need more analysis.

However, capital gains tax (income tax) is a tax to be aware of in many situations. Assuming the land is sold, there may be taxes due at that time. However, you need to do a little planning to make sure you maximize the tax savings opportunities. I would encourage you to contact legal counsel to sort through some of those issues.

Anonymous said...

I am confused. I am from Michigan and receiving an inheritance from my aunt in Iowa so why is an Iowa inheritance tax imposed? Michigan has no state inheritance tax.

Anonymous said...

Father died in Iowa....daughters live in MO............what, if any inheritance monies are taxable and how much (%-wise)...

Estate less than $500K


thank you!@

Anonymous said...

Lora My elderly mom is selling her small acreage and moving in with me as soon as possible due to health reasons.. She wants to pay off my house from the acreage which will be less than 100,000. Is it my understanding that she can gift it all to me to do that and just pay a gift tax up front and i wont eat the cost of getting so much money during the year? Thats if coming from an accountant here in iowa.

Matthew Gardner said...

Anonymous "giftee" Your elderly mom, for 2012 can gift you $13,000 without tax or even filing a gift tax return. She can also gift $5.12M without tax, but she would have to file a gift tax return. ($0 tax). You would not report anything or pay anything.

Matthew Gardner said...

Father and MO daughters question - In Iowa, there is no inheritance taxes to any lineal descendants (children or grandchildren, etc.) Thus, no inheritance taxes for the MO daughters of the IA parent. (Just unfortunate that IA money is leaving to go to MO!!)

Matthew Gardner said...

Nice to meet you Confused. (Michigan recipient of property)

We just don't like Michigan, so we just tax anything that involves assets going to Michigan.

Just kidding. As the assets involve those located in Iowa, by an Iowa decedent, Iowa law applies and not the law of where the beneficiary lives. Thus, your aunt's estate in Iowa is paying the tax for the property that you are receiving.

Anonymous said...

Where were you when our Iowa attorney talked my mother out of a Living Trust saying probating a will costs the same? Now passed and her estate soon going into probate(by same attorney)....will take months. Feel we were bamboosled! Do we have any recourse? We live out of state. Can we use a lawyer in the state we live in?

Matthew Gardner said...

Bamboosled-

I was probably here, sitting at my desk.

You don't have to use the attorney that gave that original advise. Any attorney licensed in Iowa can handle the probate proceedings, regardless if they did the will. And you can switch attorneys at any time as well. (Hopefully you negotiated fees.)

I'm still here at my desk...

Anonymous said...

Grandmother R. set up trust before her death that states that her daughter M. has lifetime income from farm land in Iowa (FMV of real property is less than $3M now) 2 grandchildren are the remainder beneficiaries. one of the grandchildren L. died before the daughter M. The trust language states that grandchild L. and grandchild MFJ are both remaindermen in "equal shares". if the deceased grandchild L. has no children, no spouse, does the real property automatically go to the living grandchild MFJ? how does the grandchild MFJ in AZ get the property in her name only. Deceased grandchild L. and daughter M. domiciled in NM. is probate necessary in Iowa and NM to transfer title/change deed etc.? What happens if granchild MFJ simply waits for her mother, that is daughter M, to die before changing the deed?

Matthew Gardner said...

Anonymous-

Several detailed questions/anwsers involved in that post. Your facts are somewhat similar to the case/post I have here at http://www.iowaestateplan.com/2012/07/old-trust-new-trust-iowa-trust-code.html

To give you a proper answer, and avoid ethical problems, it would be necessary to: (1) get a copy of the trust (2) establish an attorney-client relationship. (In other words, it isn't an easy answer.)