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The Hawkins Law Firm

160 N. Brindlee Mountain Parkway
Arab, AL 35016

Recent Estate Tax Changes Could Impact Your Estate Plan

Following much anticipation, speculation and uncertainty, on December 6, 2010 President Obama finally announced that a tentative deal had been struck with the Republicans to extend the Bush era tax cuts. Effective as of January 1st of this year, federal estate taxes are once again in effect, but with an exemption amount of $5 million per taxpayer. This means that an individual can have up to $5 million in their estate before being subject to federal estate taxes, or collectively a married couple can have $10 million in their estate before being subject to federal estate taxes, subject to certain rules and exclusions. The applicable estate tax rate now in effect is 35%. This exemption and estate tax rate will be in effect for the next two years.

How many people are impacted by this change?

According to the Federal Reserve Survey of Consumer Finances, potentially a number of Americans. According to the Survey, in 2007 over 5.4 American households had a net worth in excess of $2 million.

How does this change potentially impact you?

Tax historians note that the new estate and gift tax rates are the most generous since 1931, and provide a unique, yet temporary window to utilize various gifting strategies to pass assets to your children without incurring gift, estate, or generation-skipping transfer tax. If you have been contemplating doing some advanced estate planning, whether it is business succession planning or simply seeking to pass some of your assets to your children while minimizing transfer taxes, this is a good time to explore your options.

Even if you have no intention of making significant gifts at this time, you should have your existing estate planning documents reviewed in light of this recent estate tax change.  Many trusts contain what are known as “formula clause” provisions, which tie the amount of a bequest to the applicable estate tax exemption. These clauses were designed to maximize the amount a couple could pass on tax-free, but unfortunately fail to consider what happens when the amount of the exemption increases greatly. For example, the current exemption of $5 million is significantly different from that of past years, such as the $1.5 million exemption which was in effect in 2005. Thus, if a spouse dies in 2011 with a $3 million estate and unchanged formula clauses, the surviving spouse may be entitled to nothing outright because all of the assets would pass into a trust.

Contact an Experienced Estate Planning Attorney in Alabama

The recent tax law change presents unique planning opportunities and challenges. To learn how these changes impact your estate plan, please contact attorney Lana Hawkins at The Hawkins Law Firm in Alabama for a personalized consultation.

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