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Big Changes to the Estate Tax

At the end of 2010, the estate tax was to reset to 2001 levels. This would have meant any wealth over $1 million, at the time of one’s death, would be taxed at a rate of 55%. At the last moment, President Obama cut a deal with Republicans to pass a new estate tax, which is valid for 2011 and 2012 only.

The new estate tax is good news for wealthy people. It provides for an estate tax on wealth in excess of $5 million ($10 million for a wealthy couple who have proper estate planning), taxed at a reduced rate of 35%.

What’s more, during these two years, one may make accumulated lifetime gifts of up to $5 million tax-free, or $10 million per married couple (remember that gifts of up to $13,000 per year per donee may be made, without reducing the lifetime exemption amount). Advanced estate planning tools, such as the Intentionally Defective Grantor Trust (IDGT) or its more asset-protected counterpart, the Defective Beneficiary-Taxed Trust (DBETT), can be used in tandem with the generous lifetime gift tax exemption to eliminate estate taxes on estates up to $100 million. The IDGT, DBETT, and other advanced strategies will even allow you to retain an income stream from assets after you move them outside your taxable estate.

What will happen to the estate tax beginning January 2013? We don’t know for sure, but considering our nation’s $1.5 trillion+ annual federal deficits, there’s every likelihood that a more draconian estate tax will return. So a word to the wise: wealthy U.S. citizens should take advantage of the 2011-2012 estate tax laws to move their wealth beyond the reach of the estate tax, while they can.

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