New Laws a Reason to Review Your Estate

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McFarlane Law, PLC
14500 N. Northsight Blvd, Suite 217
Scottsdale, AZ 85260

Phone: 480-991-0032
Fax: 480-483-6673

New Federal Estate Tax and Gift Tax Changes and Arizona Trust Laws

A. Estate Tax. The most significant change in estate taxes for 2011 and 2012 is the amount of the federal estate tax exemption. In 2009, the estate tax exemption was $3,500,000 per person, which was to expire in 2010 unless Congress either extended or otherwise addressed the matter of estate tax exemptions. Finally, at the end of 2010, Congress raised the federal estate tax exemption to $5,000,000 for a single person and $10,000,000 for a married couple. This means that anyone who dies in 2011 or 2012 and who leaves $5,000,000 or less to their children or other beneficiaries will pay no estate tax. Any amounts in excess of the federal estate tax exemption will be taxed at a rate of thirty-five percent (35%) instead of the former rate of fifty-five percent (55%). However, keep in mind that Congress has once again only extended the estate tax exemption issues until 2013, when it will need to be addressed again.

B. Married Couples. Another change beneficial to married couples is the new way that federal estate tax exemptions are treated between spouses. A surviving spouse may now utilize the unused portion of a deceased spouse’s federal estate tax exemption at the surviving spouse’s death. In other words, if the surviving spouse’s estate is in excess of the surviving spouse’s $5,000,000 exemption on the date of his or her death, the surviving spouse can use any unused portion of the deceased spouse’s federal estate tax exemption to reduce the survivor’s taxable estate.

For example, if a husband dies with assets of $2,000,000. The surviving wife can use the unused portion of the deceased husband’s exemption, or $3,000,000, and her exemption amount of $5,000,000. Therefore, the surviving wife will have an exemption amount of $8,000,000 (her $5,000,000 and the unused portion of her deceased husband’s exemption amount of $3,000,000). This results not only in lower or no estate tax but a dramatically simpler method for the surviving spouse to use the deceased spouse’s exemption.

C. Gift Taxes. Gift tax exemptions now conform to the amount of a person’s estate tax exemption. This means that a person can gift, without paying gift taxes, up to $5,000,000 during their lifetime in 2011 and 2012 and an annual exemption of $13,000 per person per year. The gift tax rate is also now thirty-five percent (35%) in excess of your lifetime and/or annual exemption, the same as estate taxes.

D. Revocable Trusts. In the past, one of the reasons to establish a revocable trust was to maximize the use of a married couple’s federal estate tax exemption. This was often accomplished with the use of what is commonly referred to as an AB Trust; where a married couple’s assets are split into a survivor’s trust and decedent’s trust (or a credit shelter trust) upon the death of the first to die. The decedent’s trust used the deceased person’s federal estate tax exemption so that upon the death of the survivor the assets in the decedent’s trust was not included as part of the survivor’s assets for federal estate tax purposes. With the new federal estate tax changes, the decedent’s federal estate tax exemption can now be used by the survivor without the necessity of splitting the assets at the death of the first to die. However, this does not mean that trusts are not needed any more. It does mean that revocable trusts can be simplified especially for the surviving spouse depending upon the circumstances of the married couple and their family dynamics. The trust is still important for many other reasons, such as to avoid probate; provide privacy with respect to your assets; manage and direct assets after death or disability of one or both of the settlors; and to do a myriad of planning activities to meet the needs of blended families.

E. Arizona Trust Laws. In 2009, Arizona adopted parts of a uniform set of trust and estate laws, which have also been in part adopted by several states around the country, in addition to other changes to Arizona’s trust and estate laws. These changes do not invalidate any trusts that were existing at the time the changes were adopted. These changes do, however, give Arizonians the ability to amend their trusts to add new options and/or features to their existing trusts which were not available before and which may be very beneficial. One of the options or features include permitting a settlor to appoint a person who would have the power to change the trust after a settlor has died or become incapacitated. The appointed person would have the ability to change or remove a trustee, amend the trust to conform to tax or estate changes, and other possible changes. In addition, the changes require new reporting requirements such as requiring your trustee to report information about your trust and trust assets to your children or other beneficiaries before you die. This requirement can be specifically waived in your trust document and the waiver may be added by an amendment to your trust. Please keep in mind that these are generalities and may not be applicable to everyone. We can make specific suggestions which fit your particular circumstances.

To learn how any of these changes may affect your estate plan, please call an attorney at our firm for a free consultation for you and your spouse.

We look forward to helping you this year and we thank you for your loyalty and referrals. Please keep visiting our website for further information and blogs concerning your estate planning needs.

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