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The Federal Estate Tax and Pennsylvania Residents

Congress Acts On Federal Estate Taxes
The New Estate Tax Law: Problems, Solutions and What You Need To Know

Last night, the House of Representatives passed a bill extending the Bush era tax cuts which were about to expire, and, re-enacting a federal estate tax. And, while the new law looks favorable on it’s face, and may make large end of year gifts less important, it also contains some major pitfalls that you need to know about.

This article and several to follow, will review the essential elements of the new law and and some of the effects that it will have on Pennsylvania residents with estate of $1 million dollars or more.

Below is a summery of the rates and changes, a review of some good things and some problems, and a few strategic suggestions.

Here is a summary of some of the changes and rates:

Estate and Gift Tax under the Tax Relief Act

2010 2011 & 2012 2013
Estate Tax Exemption All Exempt $5,000,000 $1,000,000
Estate Tax Rate N/A 35% Top Rate 55%
Gift Tax Exemption $1,000,000 $5,000,000 $1,000,000
Gift Tax Rate 35% 35% 55%
GST Exemption $5,000,000 $5,000,000 $1,000,000
Generation Skipping Rate 0% 35% 55%

Some of The Good Things:

So as you can see from the chart above, the estate tax bill’s good points are that we can make gifts to both children and grandchildren over the next two years and up to $5 million dollars without paying tax.

Since GRATS were not eliminated or restricted by this bill, we can continue to use these trusts when you have an asset or assets that are rapidly rising in value.

You can and probably should consider gifting, Medicaid planning and other techniques that would use the liberal provisions for the next two years. This is especially true if you wish to help grandchildren.

The bill also contains a portability provision, that appears to allow a surviving spouse to use the deceased spouses five million dollar exemption as well. However, there are a number of potential problems with this provision that may make it far less useful than it first appears. For example, you will lose this exemption if you ever remarry. So we are also mentioning this below if the problem area.

Potential Problems

The most obvious problem is the fact that these changes only last for two years and then the law goes back to a very high rate and a $1 million dollar exemption. For young couple or for wealthier families where large gifts are not part of the plan in the next two years, your estate planning should and needs to anticipate the possible return of a very nasty estate tax.

Also, while the portability of these $5 million dollar exemptions looks good, there are a number of problems that may still make the use of trusts advantageous for protecting the surviving spouse and children and grandchildren. These issues are important to all families, but are especially important in blended families where there are children from multiple marriages or relationships.

Strategies and Actions

If You Are An Executor:

The executors of estates of those dying in 2010 may now choose to be taxed under the currently existing 2010 law or the Tax Relief Act. Review the best result with your legal adviser.

If You Are Single, Divorced, or Widowed:

This act provides a number of opportunities for those who want to make gifts or to preserve assets for children, grandchildren or others. This includes the ability to simplify some documents, and to make gifts, outright, or in trust, and to use GRATS without incurring gift taxes. At Unruh, Turner, Burke and Frees we have a team of estate planning, elder law and tax attorneys to assist you in these matters.

If You Are Married:

Be sure to have your estate planning documents, your beneficiary designations, and your overall existing estate plan reviewed. While there are some unique opportunities for planning, there are a number of potential problems with old documents or dated estate planning strategies that can and should be fixed now.

You should also make sure that your new or updated plans recognize that these changes are for only 24 months and that they are adaptable enough to deal with the change in the law back to the higher rates and lower credits in January 2013.

For more information, call David M. Frees III Chairman: Trusts, Estates, and Wealth Preservation or Douglas Kaune Chairman Elder Law at 610-933-8069.


Believe it or not, we have lawyers that advise us too. Here is their disclaimer – The information contained in this article is designed to alert you to changes occurring in the federal estate tax laws which may relate to your personal situation. It is not designed to replace individual consultation with your legal, tax, and investment advisers based on your individual facts and particular circumstances. Interestingly, Unruh, Turner, Burke and Frees ( the very folks who wrote this article) would be please to assist you and to work with your other advisers in developing or modifying your estate planning documents.

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