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A closer look at the new Investor Education

estate tax rules


A brief history of the estate tax estate tax retroactive to the beginning of 2010, there is
Since the early 1900s, the United States has imposed a provision that allows larger estates in 2010 to “opt out”
a federal estate tax, which is essentially an excise tax of the federal estate tax. Opting out, however, means
levied on the transfer of wealth at death. Although there sacrificing the ability to “step up” the cost basis on inher-
were a variety of related inheritance tax predecessors, ited assets, which can be a valuable tax planning benefit.
the modern estate tax began in earnest in 1916 with the In general, if an estate in 2010 is worth less than $5 million,
signing of the Revenue Act of 1916 into law. One of the filing for the estate tax and utilizing the $5 million exemp-
main rationales behind the estate tax was to prevent the tion may make the most sense.
concentration of property among very wealthy families.
The return of unlimited step-up in cost basis
Over time, legislative amendments to the federal estate
on appreciated property
tax rules resulted in a decline in the number of taxable
Prior to 2010, when heirs inherited stocks or other
estates each year. In fact, the current revenue generated
assets that had grown in value, the asset’s cost basis was
from the estate tax comprises only one percent of the
“stepped up” for tax purposes, generally based on the
total federal government revenue.
value of that asset upon the owner’s death. The new law
Source: Congressional Budget Office, Budget and Economic Outlook,
reinstates this full step-up in cost basis.* This can result in
January 2010.
dramatic tax savings for heirs receiving appreciated assets.
New tax law offers clarity on estate taxes
example: How the unlimited step-up can save
through 2012
inheritors money in taxes
Due to a “sunset” provision in the tax law, the estate tax was
suspended in 2010 for the first time in more than 90 years. •1,000 shares of stock originally purchased at $10/share
But the hiatus was short-lived: The recent signing of the Tax (total value: $10,000)
Relief, Unemployment Insurance Reauthorization, and Job •30 years later, owner dies and stock is now worth $100/
Creation Act of 2010 reinstated the estate tax and provides share (total value: $100,000)
some clarity on future rates — at least through 2012.
•Without step-up in cost basis: $90,000 of appreciation
Key estate tax figures may be subject to capital gains taxes; at a 15% rate, the
2009 2010–2012 2013 inheritor of the stock would owe $13,500 upon sale
estate tax •With step-up in cost basis: Inheritor’s cost basis is
$3.5 million $5 million $1 million
exemption
$100/share, which was the value of the stock at
Maximum
45% 35% 55% the time of the owner’s death; appreciation in value
estate tax rate
escapes capital gain taxation
Note: 2010 estates may “opt out” of the estate tax, although certain
other restrictions apply. Exemption and tax rates for 2013 are based on
current legislation.

The estate tax exemption is the dollar amount per indi- 1During 2010, as a result of the sunset provision in the estate tax law,
the ability to step up cost basis on inherited assets was temporarily
vidual that can be sheltered before estate taxes apply. suspended and replaced with modified adjusted cost basis treat-
Generally, with proper planning, a married couple would ment. This allowed non-spouse beneficiaries to apply an aggregate
of $1.3 million toward increasing the cost basis of assets within the
be able to shelter a total of $10 million from the reach of estate (spousal beneficiaries could apply a total of $3 million toward
the estate tax. While the new tax law actually applies the increasing cost basis of assets).
A new benefit for surviving spouses: Does this mean that only families with significant wealth
portability need to focus on estate planning? The reality is that
The 2010 tax law introduced a new provision that allows proper estate planning extends well beyond minimizing
surviving spouses to utilize any unused portion of or preparing for estate taxes. A comprehensive estate
their deceased spouse’s estate tax exemption — up to planning strategy offers the following:
$5 million — to reduce their own taxable estate. Note
•Orderly transition of wealth to heirs or charitable concerns
that a special election is required upon the death of
the first spouse in order to utilize this option, and that •Means to avoid a lengthy and costly probate process
previously claimed exemptions are not transferable •Planning for minors or other extended family members
should the surviving spouse remarry.
•Steps to transfer decision-making responsibilities in light
With this new provision, is exemption planning through of unforeseen circumstances
the use of trusts (commonly referred to as “credit shelter
•Living will or health-care proxy declarations, which can
trusts” or “A/B trusts”) still beneficial? For many families,
facilitate decisions around medical treatment or end-of-
trusts are still an attractive option for several reasons:
life wishes
•The portability provision applies to estates only through
•Documenting wishes for final arrangements
2012 with no guarantee it will be available in the future

•Even if the portability provision is extended in the future, Take the first step: Talk to your financial
it does not shelter any appreciation of assets from the advisor today
estate tax between the time the exemption is claimed Your financial advisor can help you take the first step in
(upon the death of the first spouse) and the death of the establishing an estate plan by reviewing your assets and
second spouse accounts, identifying any potential gaps, and determining
a strategy to address possible tax pitfalls. Together, you
•Credit shelter trusts, when established properly, offer
should consult an attorney on the execution of legal docu-
asset protection from creditors, meaning that the trustee
ments, which is essential in ensuring that family members’
can’t be forced to liquidate or distribute trust assets to
needs and your legacy wishes are met.
satisfy creditors of trust beneficiaries

Effective estate planning goes beyond taxes


The increase of the estate tax exemption amount to
$5 million per individual will dramatically reduce the
number of estates that will have to pay estate taxes.

NuMber of taxable estates at various


exeMptioN levels
Taxable estates annually

43,540

3,600
6,460
This information is not meant as tax or legal advice.
$1 million $3.5 million $5 million Please consult with the appropriate tax or legal
Source: Tax Policy Center, “Taxable Estates, Estate Tax Liability, and professional regarding your particular circumstances
Average Estate Tax Rate, By Size of Gross Estate,” December 2010. before making any investment decisions.

Putnam Retail Management


Putnam Investments | One Post Office Square | Boston, MA 02109 | putnam.com II546 267438 4/11

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