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    Protect more of your assets from the estate tax

    The law now allows your spouse to take advantage of your unused estate tax exemption

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    Richard F. Roth, JD
    By now, most people concerned about estate taxes understand the basic provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Effective January 1, 2011, the estate tax applicable exclusion amount became $5 million, and the top tax rate became 35%. The law also includes changes to the gift tax laws and the generation-skipping tax laws.

    What you may not know, however, is that the 2010 act provides a means for doctors and other professionals to protect their assets from creditors or malpractice claims without incurring negative estate tax implications. It also contains what amounts to a marriage tax.

    Also new are the portability provisions under Section 303 of the 2010 act. This section allows a surviving spouse to use the exclusion amount not used by the estate of a deceased spouse. In plain English, this means that if my wife holds all of my family's assets, and I die, I will not have used any of my $5 million exclusion amount.

    In the past, by contrast, I would have lost the benefits of the exclusion amount that my estate did not use. For example, if the exclusion amount were $3.5 million and my estate was valued at $2 million, at my death, the remaining $1.5 million exclusion amount would be lost forever.

    This situation would be particularly bad if my wife's estate, upon her death, exceeded the exclusion amount. Remember, her estate will be increased by everything I leave her. In such a case, her estate would incur significant taxes because our assets were not evenly divided, thereby causing my estate to lose part, if not all, of my exclusion amount. As a result, estate-planning professionals created trusts in which an amount equal to the exclusion amount would be placed in a family trust for the benefit of the spouse and would not be taxable in the spouse's estate at death. This was a major selling point in convincing clients to establish trusts.

    IMPACT OF NEW PORTATIBILITY PROVISIONS

    With the new portability provisions in the 2010 act, you no longer need a trust to maximize the exclusion amount. In the aforementioned scenario, under the 2010 act, the $1.5 million unused exclusion amount will not be lost. Instead, it will be added to my wife's exclusion amount, giving her an exclusion amount of $6.5 million upon her death. Further, no trust is needed to accomplish this exclusion increase.

    This change is significant for doctors and other professionals who can be sued personally for professional liability. It means you can transfer all of your assets to your spouse without incurring any negative tax consequences. Previously, if you wanted to make yourself "creditor proof" by transferring everything to your spouse, you would lose all your exclusion amount.

    With estate tax rates as high as 60% in 2009, this situation could be prohibitively expensive. As a result, many doctors obtained professional liability insurance and prayed it would be enough if a problem arose. Now, however, you can just transfer all of your assets to your spouse without worrying about the estate taxes.

    Of course, nothing is ever that easy. What if you get divorced or if your spouse predeceases you? Unfortunately, you cannot control whether you die before your spouse. Before you give everything to him or her, you should be comfortable with your marriage, or enter into a postnuptial agreement, that will control the distribution of your assets in the event of your death or a divorce. In such a case, as stated previously, your spouse will have a $10 million exclusion amount at his or her death (your $5 million and your spouse's $5 million.)

    IF YOUR SPOUSE REMARRIES

    What if your spouse chooses to remarry? Congress contemplated the myriad scenarios that could arise as a result of multiple marriages, divorces, and deaths,and decided to simplify the law. Simply put, a decedent's estate will be entitled to the exclusion amount of the decedent's last deceased spouse. In other words, if the deceased doctor's spouse remarries and then outlives the second spouse, he or she only would be entitled to the exclusion amount that the second deceased spouse had remaining.

    For example, if I die and everything is in my wife's name, then my wife would be entitled to a $10 million exclusion amount. If my wife remarries a man who dies without using his exclusion amount, then my wife's estate still would be entitled to the $10 million exclusion. However, if my wife marries a man who dies using his entire $5 million exclusion, leaving my wife with none of his exclusion amount, then my wife only would be entitled to her own $5 million exclusion.

    In this case, her estate is not able to take advantage of my $5 million exclusion because her estate is only entitled to the remaining unused exclusion amount of her last deceased husband. Since the last deceased husband had no exclusion amount remaining, my wife's estate has lost the opportunity to use my $5 million exclusion amount.

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