USAA - Posted 1/19/11

How the New Estate Tax Could Affect Your Legacy

Thanks to the new law, fewer families will pay estate taxes - but making your wishes become reality still takes careful planning.

The sweeping tax legislation recently signed into law made some big changes to the federal estate tax, which is applied to the value of what you leave behind at death.

In addition to extending the Bush-era income tax cuts for two years, the law temporarily prevented estate taxes from imposing higher rates on American families.

"The new law provides welcome relief, but it's important to realize that it will expire at the end of 2012," says Sven Liane, vice president of USAA Wealth Management and Trust.

Without an extension, estates of more than $1 million would have been exposed to tax rates as high as 55%. "A million dollars may sound like a large sum, but not when you consider that an estate generally includes life insurance payouts, retirement plan assets and home equity," says Liane.

"While the new estate tax provisions sheltered many more families, it's important to understand how it works — and to realize that there's far more to estate planning than just taxes," says Liane.

Today's Estate Tax at a Glance
Key Features Rules for 2011 and 2012
Estate Tax Exemption You can generally pass $5 million to others at death without federal estate tax.
Exemption Portability Any unused portion of an individual's $5 million exemption can be added to a surviving spouse's exemption.
Tax Rate Estates face a maximum 35% tax rate.
Annual Gift Tax Exemption While living, you can give $13,000 to an unlimited number of recipients each year without triggering the federal gift tax.
What's New in 2011

Before Congress acted, the estate tax was about to extend to many more American families. The new law prevented that by enacting:

  • A bigger exemption. Over the years, the federal estate tax has been structured in a way that exempts many estates from paying it. If Congress hadn't acted, that exemption would have been set at $1 million on Jan. 1, 2011. Instead, the exemption is $5 million for 2011 and 2012.
  • Exemption portability. For 2011 and 2012, if one spouse dies and doesn't use his or her entire exemption, the unused amount can be carried over to the surviving spouse's estate. That means together the couple can transfer up to $10 million without federal estate taxes.
  • A lower tax rate. Estates subject to the tax will pay a maximum rate of 35% — instead of the 55% rate that was set to take effect this year.​
Gift Limit Remains
  • Split gifting. Married couples can effectively double the annual gift limit to $26,000 by making a split gift election. To make that election, you'll need to file a gift tax return even if no tax is due.
  • College savings plans. In addition to allowing large contributions and tax-free withdrawals for qualified higher education expenses, 529 college savings plans also allow you to make up to five years of contributions in advance1 — without triggering gift taxes. "For a married couple, that opens the door to gifting $130,000 all at once," says Liane.
  • Direct assistance. You can pay an unlimited amount of another person's tuition or medical expenses without being subject to gift tax, as long as you pay the provider directly.
Existing Plans Should Be Reviewed

Even if you've already worked with an attorney to minimize your estate taxes, you should revisit your plan with a professional to ensure it's still appropriate in light of the new law.

"It's very common for wills and trusts to use formulas that refer to the estate tax exemption. Given how much the exemption has changed over time, that can lead to some unintended consequences," says Marilyn McWilliams, an estate planning attorney and author of "Life After Death."

For example, your will may prescribe that an amount equal to the estate tax exemption be placed into a trust for your children, with the remainder passing to your spouse. With the exemption soaring from just $675,000 in 2001 to $5 million today, wills with these provisions may leave no remainder for a spouse — disinheriting the wife or husband altogether.

Legacy Planning: Not Just for the Wealthy

When planning your legacy, taxes are only one consideration. The real point of an estate plan is to make it as easy as possible for your heirs to carry on and to ensure your assets go where you want them to.

Liane cautions members with less than $5 million from concluding that estate planning is unnecessary. "Nothing could be farther from the truth," says Liane.

"Whether your net worth is $5,000 or $5 million, everyone should have an estate plan."

Generally, every plan should include:

  • A will, which is a set of legal instructions for distributing your investments, property and possessions after your death. It can also be used to identify a guardian for minor children. "In addition to reviewing your will after big changes to the laws, you should also review it when you experience life events like marriage, divorce or the birth of a child," says USAA CERTIFIED FINANCIAL PLANNER™ practitioner Joseph Montanaro.
  • A living will, which expresses your wishes about efforts to extend your life. Living wills are sometimes called "advance directives."
  • A durable power of attorney, which authorizes someone to make financial and legal decisions on your behalf if you're disabled or incapacitated. "Without a power of attorney, a court may have to put people you don't know in charge of your assets," says McWilliams.
  • A health care power of attorney, giving someone the authority to make medical decisions on your behalf. "Since spouses often travel together, you should have at least a few alternatives in case you're both in an accident," counsels McWilliams.
  • Updated beneficiary designations on life insurance policies, annuities, IRAs and other retirement accounts. "These designations take precedence over your will, so it's critical that they reflect your wishes," says Montanaro.

A qualified attorney can help you create a sound legacy plan. In addition to the basic tools of estate planning, an attorney may also recommend a trust, which can reduce estate taxes, make plans that would go into effect if you become incapacitated, and provide professional management of your assets.

One estate planning limit that didn't change is the amount you can give to an individual each year without triggering a federal gift tax. The limit remains at $13,000, but there are ways to stretch it.


About Moye White LLP

Moye White is a Denver-based business law firm serving clients throughout the United States and internationally. The firm provides legal representation across a wide variety of transactional and litigation matters, offering strategic, business-oriented counsel to public, private, and governmental clients in complex business and real estate transactions and disputes. As one of the first Denver law firms to achieve B Corp certification, Moye White meets rigorous standards of social and environmental performance, transparency, and accountability. For more information, please visit moyewhite.com or contact Managing Partner Thomas List at 303-292-2900 or tom.list@moyewhite.com

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