Due to its inclusion in the recent compromise tax bill, the changes to the Federal Estate Tax have received a substantial amount of publicity. As most people know, the new tax law substantially changes the Federal Estate Tax. Under the new law, the first $5,000,000 of a person's estate is tax free. This increased the available exemption from the $1,000,000 amount set to return in January and the $3,500,000 amount in place in 2009. In addition, the rate of tax decreases to 35%. Overall, far fewer people will be paying a Federal Estate Tax and those that are will be paying less than before.
One of the most interesting features of the new law is the portability provision. Previously, if a spouse died without using his or her exemption (e.g. by giving all assets to the surviving spouse) the exemption would be lost. When the second spouse subsequently died, he or she would have only his or her own exemption to work with. Planning would typically be put in place - using bypass trusts often funded through disclaimers - to try to utilize both exemptions. Under the new law, however, the surviving spouse will be able to utilize the deceased spouse's exemption to the extent it was unused. This could potentially allow a surviving spouse to carry a $10,000,000 exemption! While this feature seems like a great gift from the government there is at least one catch. In order for the surviving spouse to use the deceased spouse's exemption, a Federal Estate Tax Return (form 706) will need to filed following the death of the first spouse. While the time and cost of filing a return will be worth the potential savings in the future, the new law creates a trap for the unwary.
Jenei & Cohen, P.C. provides estate planning services for individuals and couples at all levels of wealth. Please call for a consultation.
