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Estate Planning Update for Landowners

Posted: February 13, 2011

A general overview of the new estate tax and gift law for 2011 and 2012.

Recent legislative action has provided us with a new gift and estate tax law for 2011 and 2012, although a temporary one. In a surprising move to many, congress and President Obama signed into law a modification of the “Economic Growth and Tax Relief Reconciliation Act of 2001“ Here is a table that shows the estate tax exclusion rates that began  in 2001 and the new exclusion rates for 2011 and 2012

YEAR

EXCLUSION

FEDERAL ESTATE TAX RATE

2001

$675,000

50%

2003

$1,000,000

49%

2005

$1,500,000

47%

2007

$2,000,000

45%

2009

$3,500,000

45%

2010

Unlimited

-------

2011 &2012

$5,000,000

35%

***2013

***$1,000,000

***55%

*** These will be the Estate Tax Exclusion rates in 2013 if no changes to current law are implemented.

In essence, exclusions simply are the amount of money or other assets that our estates can accumulate without the penalty of additional taxes being imposed at the time of our death. In this case, the exclusions listed above are for federal estate taxes. So, with the passing of this temporary modification, the 2011 and 2012 Estate Tax Exclusion has been set at $5,000,000 for each individual. Total assets of an individual estate that total less than $5,000,000 should not present any federal estate tax consequences in 2011 and 2012.
 
In addition to the new federal exclusion amounts for 2011 and 2012, there are new special rules for married couples. If one of the spouses were to die in 2011 or 2012 and did not use up the entire $5,000, 000 exemption, the amount of exclusion left may be used by the surviving spouse. The best way to explain this is probably with an example. Let’s say that Joe and Sally are married. Joe unfortunately dies in 2011 and leaves $1,000,000 in assets to Sally. Under the new rules, if Mary were to die let’s say in 2012, her estate can use both her $5,000, 000 exemption and also use the $4,000,000 exemption left over from Joe’s estate that had gone to Mary. Her estate then could leave a total of $9,000,000 in assets to her heirs without federal estate tax consequences. In the past, a married couple would need to set up a by-pass trust to accomplish this.

The discussion thus far in this article has focused on the temporary modification of the “Economic Growth and Tax Relief Reconciliation Act of 2001 and how it affects federal estate taxes. Another portion of the “Federal Gift and Estate Tax Law” focuses on the rules related to gifts made yearly and in total over a person’s lifetime.

• From 1/1/06 through 12/31/08, the annual tax free allowance for gifts from individuals had been $12,000.  As of 1/1/09, this increased to $13,000.In other words; any individual can now “gift” $13,000 in assets (property, cash, or other assets) to any other individual(s) without filing a federal gift tax return and these gifted assets will not have any bearing on future estate or gift taxes.
(Ex.) I, as an individual, have 3 children.  I give each $13,000 in cash in 2011. I do not have to file a Federal Gift Tax Return for 2011 and the monies given have no effect on my Lifetime Gift Tax Exclusion. (Please keep in mind also that there should be no tax liability to the receiver of these gifts.)

•  For married couples, each is allowed to give $13,000 per year or $26,000 combined without adding to the gift tax exclusion and filing a gift tax return.
(Ex.) My wife and I have 3 children. We each individually give a $13,000 gift to each of our three children in 2011. Neither of us would need to file a federal gift tax return and the monies given have no effect on our Lifetime Gift Tax Exclusion.

Lifetime Gift Tax Exclusion – In addition to the annual tax free allowance for gift taxes, there is also a Lifetime Gift Tax Exclusion. This is the total amount of assets in one form or another that can be gifted away without incurring any federal gift tax during a person’s lifetime. In 2010 the lifetime gift exclusion was $1,000,000. For 2011 and 2012, the lifetime gift tax exclusion has been increased to $5,000,000, the same figure as the estate tax exclusion rate. Please keep in mind that when gifts are given to another individual in any one year and exceed $13,000, a federal gift tax return must be filed (IRS Form 709, United State Gift Tax Return) which will then reduce the Lifetime Gift Tax Exclusion and also the Estate Tax Exclusion amounts available.

As you can see, the current federal estate and gift tax laws are somewhat complicated. Changes made for 2011 and 2012 are significant and will certainly have an effect on local landowners and the estate planning decisions that are currently being made.

This article is written by Gary Hennip, Penn State Extension Educator and has been written for educational purposes only. These issues should be discussed with professional financial advisors and attorneys who have a good understanding of state and federal estate laws, the natural gas industry, and the implications that lease and natural gas royalty payments may have on local landowners.