Anyone who counts on consistency in federal tax law is destined to be disappointed. The estate and gift tax law has changed continuously, and with it, the plans carefully made by those planning their estates. In 2006, this is especially noticeable.
The federal estate tax credit has increased on January 1 to $2 million. That means that the tax on the first $2 million of each person's estate is credited, or, more particularly, gone. For a couple who has planned their estate properly, $4 million can be protected from tax with a trust or will that takes both of their tax credits into account.
This credit will grow again and then result in the total elimination of the federal estate tax in 2010. If it is not amended, however, in 2011 it will revert to the level that it was in 2001. However, No one expects that result.
Now that we are half way through the estate tax phase-out, what are the ramifications? First, the tax credit mentioned above has kicked in. Second, the rate of tax for estates has gone down from 55 percent to 46 percent, and goes down slightly until disappearing in 2010 (only to reappear at 55 percent in 2011 unless amended). The gift tax exemption has grown to $1 million and stays there for the near future. Basis in assets is stepped up at death when tax is paid except for 2010 when the tax disappears and the step-up is eliminated. Those who worry about that should compare the capital gains tax rate to the estate tax rate!
What do all of these federal changes mean? In addition, what do changes in New Hampshire estate law mean? A few things should be apparent to most clients.
First, estate plans based on prior tax law for planning should be reexamined to see if they should be simplified in light of changes. If not changed, present plans could complicate plans unnecessarily.
Next, those clients who have divided the assets in their estates to plan for prior tax amounts, may wish to re-examine those allocations.
Further, if clients have left assets to those outside of their families so they can maximize personal tax credits, they may inadvertently have left more than they expected to non-relatives because of the use of formulae. This needs to be checked.
Capital gains calculations as the basis for estate planning may be incorrect, due to the changes in the law affecting assets and gains.
Finally, while federal law affects everyone equally, and while the laws affecting New Hampshire families have a tendency to be those of New Hampshire and Florida, state laws in other states such as Massachusetts require an examination of estate plans to see what the tax effect is. Those who own property in several states could be subject to the laws of all those states for taxation and probate, if planning is done incorrectly. This could result in major expenses that could be avoided with proper planning. In addition to all of this, New Hampshire has passed changes to its trust laws that could have an effect on present plans or the efficacy of current advance directives.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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