What Does the New Estate Tax Mean for You?

No one predicted that we would end up where we have arrived with respect to the federal estate tax – no tax for those dying in 2010, no tax for those dying with $5 million or less in 2011 and 2012, and a punt down the field after that.

Very few estates were subject to federal tax even before 2010, therefore few were affected by the one-year repeal and few will be affected by the new $5 million threshold.  On the other hand, many taxpayers have been saved from having to do tax planning because the new law prevented the threshold from reverting to $1 million, which would have occurred in the absence of a deal between the Republicans and President Obama.

Some taxpayers will now feel more free to make gifts to family members because the new law also raises the gift tax threshold from $1 million to $5 million, though most people were never at risk of giving away more than $1 million during their lives.

Ohio, however, has retained its estate tax on all estates over $338,333, though at a much lower rate than the federal estate tax, which is 35% for the next two years.  Ohio estate tax is 6% to 7% of the amount over $338,333.  A $1 million estate, for instance, will be subject to a $44,700 tax.

If the taxpayer is married, this tax can be avoided through planning that preserves both spouses’ $388,333 exemption.  If the taxpayer is unmarried, the tax can be reduced through judicious gifting and other means.  Whether it is worth it to take these steps to eliminate or reduce taxes is up to each individual.

Four bills have been introduced to the Ohio Legislature to reduce or repeal the Ohio Estate Tax, but no action is likely to be taken this session.

Whether you need to or choose to carry out estate tax planning, there are many non-tax reasons to plan your estate.  Here are a few:

  • To provide for an orderly process of settling your estate.
  • To avoid probate.
  • To avoid disputes among family members.
  • To choose who will benefit from your estate, rather than defaulting to the government’s plan to distribute your assets.
  • To provide long-term tax deferral of retirement assets.
  • To provide for children and others with special needs in a way that will protect what you leave from poor management decisions and allow your heirs to continue to qualify for public benefits.
  • To protect your children and grandchildren in the event of divorce, lawsuit, or premature death – to make sure what you leave stays in the family.
  • To provide for your own care and well-being and management of your assets in the event of incapacity.
  • To protect your assets in the event you need long-term care or are sued.
  • To benefit charities you value, whether through a simple donation or to create a legacy.

As you can see, estate planning is about a lot more than tax planning – although in Ohio of course, tax planning can still play a major role.

**This article has been revised and reprinted with permission from Margolis and Bloom, Boston, Massachusetts.**

Prepared by:
Marta J. Williger
Elder Law Attorney

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