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Estate Tax Update: What the Changes Mean for You

It’s been a busy couple of weeks with estate tax changes — both state and federal. I spent last week at what some consider to be the Superbowl of estate planning. While at the Heckerling Institute on Estate Planning in Orlando, (not heckling as in what I do when Illinois plays Michigan, but Heckerling, as in Philip Heckerling, a long-time University of Miami law professor) I listened to top experts discuss the newest tax laws. Here’s my two-minute recap:

  • Cuts in D.C. New federal law allows the transfer of $5 million without being subject to the estate tax. Without Congress’ action, it would have been just $1 million in 2011.
  • Increase in Springfield. The Illinois estate tax is back for estates over $2 million. So, it is now possible for someone who may not owe federal estate taxes to owe the state version.
  • Ticking Clock. The renewal of the federal tax cut ends in 2 years. So, in 2013, estates over $1 million will face an increased tax unless Congress acts.
  • Portable? One part of the federal law is something new. It’s called “portability” of the estate tax exemption. (I like to call it a “coupon.”) Basically, the $5 million coupon can now be transferred to a spouse if not used. This means that a widow can use her $5 million coupon plus her deceased husband’s $5 million coupon, making that a total of $10 million that she can pass on without tax. Congress said it included portability to help people avoid “complicated planning.” We’ll see how that plays out, because the transfer is not automatic. When the first spouse dies, the spouse left behind must still take legal steps to transfer the “coupon.”
  • Illinois “coupon” is not portable. Unlike new federal law, the Illinois $2 million limit can’t be transferred to a spouse (so surviving spouse only has $2 million coupon, not twice that). To use both coupons, you must do planning prior to the first spouse’s death by having your plan leave assets directly to the kids or to a Family Trust (also called “Credit Shelter Trust” or “A-B Trust”) for the spouse to use.
  • It only counts when you die. What the law says now doesn’t matter unless you pass away in 2011 or 2012. What does matter is what the law says when you pass away. Who knows if taxes will be higher or lower then?

SO, WHAT SHOULD YOU DO ABOUT YOUR PLAN? Here are some tips:

  1. Stick with the basics. Nothing Congress can do will change the basics. Regardless of what Congress does, you still need to update your legal documents, keep your assets organized, and have conversations with your family about what is most important to you.
  2. Don’t let Congress do your planning for you. You don’t want a knee jerk reaction whenever Congress does something. Instead, focus on what you want to accomplish. Of course you want to save taxes, but what ELSE do you want? How do you hope your plan will improve lives or impact others?
  3. Don’t do it alone. Too many attorneys are transactional – they draft a document and their job is done. To respond to these changing times, you need an ongoing attorney relationship and a system to keep your plan up to date. Our clients rely on our Dynasty Membership Program to let them know when updates are needed.

To learn more about taxes and estate planning, check out the “Tax” section of our website.

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About the Author

David Edwards founded Edwards Group LLC in December 2008. His goal in creating the firm was to create a law firm that focused only on wealth protection and estate planning issues.

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