Federal Estate Tax: Mixed Benefits

Most have probably heard about the significant increase in the federal estate tax exemption and decrease in the federal estate tax rate enacted at the end of 2010. Over the past decade, the aggregate amount that may pass to people other than a spouse or charity free of federal estate tax has increased from $675,000 to where it is today at $5 million (double these amounts for a married couple). The tax rate that applies to the excess has decreased from 55 percent to the current rate of 35 percent. (Transfers to U.S. citizen spouses and qualified charity remain fully exempt.)

We highlight two potential issues that may offset some of the benefit of the new federal law.

First, for those with wills providing for the exempt amount to pass to children or other beneficiaries with the balance passing to the surviving husband or wife, the new law could have the unintended consequence of keeping a great deal more out of the spouse’s hands than expected. No federal estate tax would be due, but now the first $5 million of the estate (rather than the much lower amount that might have been exempt at the time the will was drafted) would not be available to the surviving spouse.

Second, for those living in states that have “de-coupled” from the federal estate tax law, including D.C. and Maryland, an estate that takes full advantage of the federal exemption could owe a state tax when none was expected. D.C. and Maryland, for example, have only a $1 million exemption from their local estate tax, with rates ranging from approximately 6 percent to 16 percent on any excess that passes other than to a spouse or charity. If $5 million passes into a “bypass trust” for the benefit of the surviving spouse and children, no federal estate tax would be due, but nearly $400,000 could be owed to D.C. or Maryland. (At this time, Virginia has no separate estate tax.)

Your estate planning lawyer can advise you regarding your own exposure to these issues and revisions to your estate plan that may achieve your desired results. Of course, you may have to visit your lawyer again in two years, as the current federal estate tax law is in effect only for 2011 and 2012.


This post was originally published in the Washington Business Journal’s WBJBizBeat Blog. Read more: Federal estate tax: Mixed benefits | Washington Business Journal