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Despite Federal Portability, Estate Planning Still Necessary


As of last year, the estate tax was in a “repealed” status.  Anyone passing away in 2010, including the late owner of the New York Yankees, George Steinbrenner, was fully exempt from the estate tax.  However, as of January 2011, the estate tax has been reenacted and changed.  On the federal level, estates valued at $5 million or less will be completely estate tax free.  The highest estate tax rate continues to be 35%.  In addition, for federal estate tax purposes, marital and bypass trusts used to be required to take advantage of a spouse’s exemption in the estate tax.  It is no longer required to have a valid marital bypass trust to take advantage of your spouse’s exemption.  The federal law allows your estate to automatically use a deceased spouse’s exemption to reduce your estate taxes when you die.  Spouses have a total of $10 million potential between them.  This is very important since the law also states that if a deceased spouse does not use the full $5 million dollars the balance rolls over to the surviving spouse.

State Influence

Until now, most large estates only had to consider federal estate tax consequences.  What frustrates the seemingly blissful existence of the first paragraph in this report is that there are two sovereign taxing bodies that are entitled to tax estates.  One is the federal government; the other is the state of residency in which the deceased taxpayer lived.  In response to the high dollar limit on the estate tax exclusion enacted by the federal government for this year, states have responded.  As of February 2011, several states have enacted estate taxes that carry lower exemption amounts.  Illinois, for example, has imposed a $2,000,000 exemption.

It is in the state level taxes that martial and bypass trusts become relevant again in tax planning.  Illinois, for instance does not have portability with the federal estate tax.  If you do not have a valid bypass/marital trust, the unused portion of the Illinois estate tax exemption is lost. Further, with only a $2 million dollar exemption, the state will receive estate taxes on some of the money that is exempt from federal estate taxes.

For a business person, farmer, or even a well funded retiree’s estate, this can spell disaster in the form of a large state estate tax due.

Legal Utility of Trusts

While the tax utility of trusts may have been diminished under the new federal estate tax laws, it is also remarkable that legal utility remains in state estate planning with the use of trusts.  Some of the benefits are still present with trusts, i.e., who gets to manage the property and who gets the property in the end.  Without effective estate and business succession planning, many businesses are still at risk to succeed to the next generation.

Estate Plan

To best deal with these issues, individuals should have a complete estate plan including a will, living will, health care and property power of attorney, a marital trust, and a bypass trust. Quite simply put, the living will, the healthcare and the property power of attorney documents aid an individual in sorting out issues with their healthcare and property decisions.  The will directs the estate as to what to do when a person dies and how they want their affairs handled.  The marital and bypass trusts keep and carry the estate tax exemption forward and also provide for control of closely-held entities when a person passes on.


There are factors driving this trend!  First, states such as Illinois are running huge deficits.  The easiest way to get tax revenues is quite simply to raise taxes, including the estate tax.  Even though eleven states currently have their own estate tax separated from that of the federal government, the trend is that more and more states are moving towards uncoupling their estate taxes from that of the federal government.

Combine the trend in the states with control and decision making factors that are always critical and present no matter what the estate tax exemption is.  Individuals are always wise to execute marital and bypass trusts as part of their complete estate and business succession plan.  If you have a business or any other assets, our advice is to begin estate and business succession planning today.  Without a complete plan, your business is at the mercy of the state and federal governments, and those that administer your estate.

What is especially frightening is that your state may still be coupled to the federal exemption.  If your spouse passes away and the state subsequently enacts a separate estate tax law, your marital exemption can and will be lost.  This could happen at the federal level as well, given the federal estate tax is subject to change in the next two years.  Begin planning today!

By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors