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Best moves for getting your estate in order, after the Tax Relief Act of 2010.

 The Tax Relief Act of 2010, passed in December, opens a number of new estate planning opportunities – some of which may be short-lived, since the law expires at the end of 2012. Of course, with the change in the law comes the possibility that your current estate planning may need some updates, both to reflect the new rules and perhaps to take advantage of opportunities that were not previously available to you.

In their article The New Rules of Estate Planning, Smart Money focused on a few of the most common issues to consider.

  • Gifting as a Means of Asset Protection. The new law raises the gift tax exemption from $1 million to $5 million, which means you can give away up to $5 million of your estate without paying gift taxes. Under the previous law, sheltering significant holdings from potential creditors required sophisticated planning, legal entities and valuation discounts. Now, especially with the market-induced valuation discounts, transferring significant holdings is much less complex, and you can much more easily shift up to $5 million to someone else. If you have asset protection concerns, this may be a strategy to discuss with your estate attorney.
  • Formula Clauses. Certain wording in older estate planning documents could have unintended consequences in today’s generous tax-exemption environment. For example, it was not uncommon for documents to call for “an amount up to the federal estate tax exemption” to be transferred to a trust for the benefit of your children, with the balance passing on to your spouse. This, when the exemption amount was $675,000, may have made sense. But with a $5 million exemption, the same language could easily result in unintentionally disinheriting your spouse.
  • Dynasty Trusts. The new rules also make certain types of trusts more attractive, like the Dynasty Trust, which can shelter assets from estate taxes for generations. More than half the states and the District of Columbia now allow such trusts, and there is talk that these types of trusts could be curtailed in the future. So now may be a good time to explore the possibility.
  • State Taxes. Sixteen states and the District of Columbia have decoupled from the federal estate tax guidelines and enacted their own estate tax laws. And, given the revenue-fix many states are in, who knows what will happen next? To help avoid a future state tax bite, an aggressive gifting strategy now might be a good strategy to consider.

You can learn more about estate and gift taxes on our website. And, be sure to sign up for our free newsletter to stay abreast of changes that could affect you, your family and your estate plan.

Reference:  Smart Money (July 14, 2011) “The New Rules of Estate Planning


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