San Diego Financial Advisor Discusses Legislation Regarding Estate Planning

 By: John Dubots
With over 20 years as a Temecula Valley and San Diego financial advisor, I have seen tremendous fortunes eaten by inheritance taxes. Recent legislation introduced a temporary estate planning option called "portability" which allows a surviving spouse the ability to utilize a previously unused portion of estate tax exemption from their deceased spouse. This new proposal could minimize the amount of estate taxes paid by married couples.

Here's how "Portability" works

The federal government imposes a tax on the value of property and assets transferred to your heirs upon your death. While a surviving spouse is allowed to inherit the full value tax free, the amount that is passed directly to a nonspouse is currently tax deductible up to $5 million (as of 2011). This means an exemption on inheritance tax is is allowed for nonspousal beneficiaries on any amount less than $5 million and federal estate tax (currently 35%) must be paid on amounts exceeding $5 million.

Prior to the new tax law, if one spouse died and passed 100% of the assets on to the surviving spouse, the estate tax exemption was not needed and in essence, wasted. Then, when the surviving spouse passed on, the heirs could be responsible for estate tax liability if the total assets exceeded the $5 million mark.

Consider this example:

Married couple Jim and Betty have joint assets of $8 million. When Jim dies, 100% of the assets are transferred to Betty, meaning that no estate tax is due (since everything went to the surviving spouse) and none of Jim's potential $5 million exemption is used. Under old tax law, if Betty's estate is still worth $8 million when she passes away, her heirs would benefit from her estate tax exemption of $5 million, but would be forced to pay a 35% federal estate tax on the remaining $3 million- a whopping $1,050,000 tax liability.

Now, under the new legislation, Betty is allowed to use not only her $5 million exemption, but also the exemption that was not used by Jim. This means a full $10 million exemption and no tax liability on the $8 million passed on to her heirs. Typically, a family trust (credit shelter trust) was used to accomplish a similar result, but the portability law now protects families without a trust in place.

With this in mind, there are still a number of instances where a family trust may still be beneficial such as protecting assets against creditors, giving the first spouse to die control of final distribution of assets when the surviving spouse dies, and other aspects which make family trusts a wise option. The portability provision expires at the end of 2012. The bottom line is choosing a path that allows you to build and protect your wealth properly. Doing this correctly requires the advice of a professional who understands tax laws and is up to date with current policy at both the state and federal level. The right advisor will fully explain your options and be quick to notify you when conditions change- as so often they do.
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