Do New Federal Tax Laws Affect You?

By Rollyn H. Samp

There has been so much confusion on the changes in the federal estate tax law in the past couple months, I thought it is timely to share my analysis with you.

First, we heard lots in the fall about the 10-year "Bush tax cuts" expiring on 31‑December‑2010.  That included the federal estate tax exemption which would have dropped to $1 million per person on 1 January 2011.

Secondly, after the November elections Congress reconvened and passed a two‑year extension of the Bush tax cuts which was signed by the President.  Some new items were added to the tax code also.

For estates, the new federal tax exemption for two years only is $5 million per person/$10 million per couple.

But here's the bad news - - - if Congress does nothing further by 31‑December‑2012, the federal estate tax exemption will drop to $1 million per person with a 55 percent plus tax on everything over the exemption.

Since the federal gift tax exemption was also raised to $5 million per person for two years, the time is ripe for updating estate plans.

The federal tax changes coupled with South Dakota's repeal of state inheritance taxes, the ability to do "informal probate" and the state's favorable trust laws including dynasty trust laws are all pro‑taxpayer features to be utilized by all who want to make family asset protection from unnecessary taxes a priority.

Some other tax changes benefiting many clients include:

  • Health insurance deduction for the self-employed.
  • Small business health care tax exemption.
  • Expensing small business purchases.
  • Depreciation increase on business vehicles.
  • Bonus depreciation on some properties purchased for business purposes
  • And more.

So who loses under the new tax law?

  1. Persons with large estates that fail to utilize some of the choices under the new law with the next two years;
  2. Residents of states like Minnesota who still have low state inheritance tax exemptions (Minnesota's state inheritance tax exemption is $1 million per person with graduated state taxes above that) and don’t utilize South Dakota’s favorable Trust Laws.
  3. Those who fail to utilize the opportunity to legally avoid taxes with a South Dakota dynasty trust or other entity.
  4. Taxpayers who may be worth more than $1 million dollars in the next two years who fail to redraft their estates to reflect the present law and anticipate potential changes after 2012.
  5. Taxpayers who fail to utilize all provisions of the new two-year temporary tax law.

 We will continue to monitor and share with you this ever changing area of the law.