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The Hawkins Law Firm

160 N. Brindlee Mountain Parkway
Arab, AL 35016

Tax Changes Impact Estate Administration in 2011

In our last blog entry we discussed how the tax changes which went into effect on January 1st of this year could impact your estate plan. In this month’s blog, we will examine how the new tax law provides an option for the executor of an estate of a person who died in 2010 to select between the “repeal” regime of 2010 and the new “taxable” regime as it applies in 2011 and 2012.

What does this mean for an estate?

The executor can make a choice between:

  1. Avoiding all estate taxes, regardless of the size of the estate, but receive only a limited stepped-up basis for capital gains tax purposes; or
  2. Take an unlimited stepped up basis, but the decedent’s estate will be subject to estate tax to the extent it exceeds $5 million, excluding amounts passing to a surviving spouse or a charity.

Which option is better?

If an estate is less than the exemption amount of $5 million, or if the amount of the estate over the exemption passes to a trust for the surviving spouse, it is probably more advantageous to opt for the “taxable” regime in order to take advantage of the unlimited step up in basis. Even if the estate is significantly more than $5 million, if the excess amount is passing to the surviving spouse or in trust for the surviving spouse, there will be no estate tax owed due to the marital deduction, since the estate tax will be deferred until the death of the surviving spouse.

If, however, the surviving spouse’s estate is likely to be much higher than the $5 million new estate tax exemption, it makes sense to avoid the 35% estate tax under the taxable regime, even though it means the estate will only receive a limited stepped up basis. The general rule is: larger the estate, the greater the incentive to elect for the repeal regime to avoid any estate taxes.

Thanks for reading our blog. The new 2010 tax act makes significant changes to gift, estate, and generation-skipping transfer taxes which are complex and confusing. If you have any questions, or need assistance with an estate planning, probate or trust administration matter, contact attorney Lana Hawkins at The Hawkins Law Firm.

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