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Recent Tax Deal Encourages Wealth Transfers to Heirs

A deal reached by President Barack Obama and Republican legislators will allow the wealthy to more easily transfer money to their heirs.

The Bush Administration's tax rules were set to expire at the end of 2010, and lawmakers had to act fast when they made the deal in December. The deal is now law, and has important implications for estate and tax planning.

Details of the Tax Deal

The tax rates for gifts had been anticipated to reach 55 percent, but the new rates cap the tax at 35 percent. In addition, the exemption is $5 million. Estate taxes have the same cap and exemption.

Couples who wish to give funds to their children can give up to $10 million without paying taxes.

An unusual aspect of the tax laws is the concept of "portability." If a deceased spouse has not used all of his or her estate tax exemption, the surviving spouse may use it - but only through 2012.

Who Will Benefit

The primary beneficiaries of the new tax laws are people with substantial assets. The vast majority of American households come in well under the $5 million limit for individuals and the $10 million limit for couples.

For households that come near or surpass those limits, however, the numbers are crucial.

Time May Be Limited

The new gift and inheritance tax laws are set to expire at the end of 2012. While this gives families a window of time during which to act, they should not wait to seek competent tax advice.

Massachusetts, for instance, has an estate tax system that all residents should be aware of. This tax is in addition to the federal estate tax.

In addition, portability becomes more complex for couples who are divorced or who have remarried. While the new tax rules may be a welcome break for many, there may be other, more favorable options to explore.


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