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Estate Tax Relief in the Tax Relief Act of 2010 

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of2010 (the “Act”). Although the primary feature of this legislation is a two-year extension of the Bush-era income tax cuts, the Act also addresses the repeal of the estate tax for 2010 and its reinstatement in 2011. The legislation reenacts the estate tax for 2010 (but grants an option to elect back into the repeal), and provides generous estate and gift tax exemptions and rates for 2011 and 2012. Unfortunately, the Act is only a temporary measure – in 2013, the pre-200l estate and gift tax provisions will return, with the potential to impose a much greater tax burden on estates and gifts.

Following is a summary of the provisions of the new Act, with a discussion of the opportunities and pitfalls that it presents for your personal estate planning.

Estate and Gift Taxes in 2011 and 2012

For decedents dying in 2011 and 2012, the Act greatly reduces the reach of the estate tax by granting estates a $5.0 million exemption for property subject to the tax. In 2009, the last year in which there was an estate tax, the exemption was $3.5 million, so this is a significant increase. In addition, the Act introduces the concept of exemption “portability” between spouses – if one spouse does not use all of his or her $5.0 million exemption, it may be used by the estate of the surviving spouse, effectively creating a $10.0 million exemption for married couples. The few estates that exceed this $5.0/$10.0 million threshold will be subject to a new 35% estate tax rate, considerably lower than the 45% rate that prevailed before 2010.

Gift taxes are also lighter. Since 2001, taxpayers have had only a $1.0 million lifetime exemption for gift tax purposes. That exemption is increased to $5.0 million for gifts made in 2011 and 2012, and the tax rate on 2011 and 2012 gifts in excess of that amount is 35%. We believe that this change provides significant new opportunities for many of our clients to reconsider the lifetime transfers they may be willing to make.

Estates of Decedents Dying in 2010

The estates of those who died in 2010 faced considerable uncertainty prior to the passage of this legislation. A 2001 law repealed the estate tax for persons dying in 2010, but also imposed a carryover basis regime that required that heirs use the decedent’s tax basis for inherited property. Before 2010, that property received a new income tax basis at death. For some heirs, this 2010 basis carryover regime resulted in a greater tax burden than would have been imposed by the estate tax. In addition, there was a risk that the estate tax would be retroactively reinstated for 2010, so many executors did not know what to do.

Congress has now eliminated that uncertainty for 2010 estates. It has repealed the carryover basis and reinstated the estate tax for 2010, but with the $5.0 million exemption and 35% tax rate that are also available in 2011 and 2012. The new law also provides that estates of persons dying in 2010 can elect out of the estate tax, provided that they accept the carryover basis regime.

The estate tax return is normally due nine months after the date of death. In light of the special circumstances in 2010, the Act extends that filing date (as well as the payment date for the tax) for 2010 decedents to September 17, 2011.

Generation-Skipping Transfer Tax

The Act makes a number of changes to the generation-skipping transfer (GST) tax, which, to simplify things a bit, is an additional tax imposed on gifts and bequests to grandchildren and great-grandchildren. The 2001 legislation repealed the GST tax for 201 0 only, but there was a lack of clarity as to the effect of that repeal. The recent Act should eliminate that uncertainty, because it provides that the GST tax was in effect in 2010, but with a 0% tax rate. This means that any generation-skipping transfers that occurred in 2010 were tax-free, but that taxpayers could still take advantage of the various GST tax exemptions that could reduce or eliminate the tax in future years. Going forward, the Act aligns the GST tax with the reformed estate and gift taxes. In 2011 and 2012, the GST exemption is increased to $5.0 million and the tax rate is 35%. In 2013, the GST tax, like the estate and gift taxes, will revert to a $1.0 million exemption and a 55% tax rate.

Planning Opportunities

Estates of decedents who died in 2010 now have certainty as to the tax law, but still must decide whether accept the new default regime ($5.0 million exemption, 35% tax rate) or to elect into the prior 2010 law (no estate tax, but with carryover basis).

If the estate is less than $5.0 million, in most cases it will be best to accept the application of the estate tax and thereby acquire a basis adjustment in the assets. But an analysis should still be done to determine whether the heirs are better off with a full basis adjustment or the carryover regime. It is worth noting that, if the estate of a married decedent accepts the application of the estate tax in 2010, the portability provisions do not apply to the unused portion of the $5.0 million exemption. Portability applies only to decedents dying in 2011 and 2012.

If an individual is likely to die in 2011 or 2012, his or her estate plan must be reviewed to determine whether it takes full advantage of the $5.0 million exemption and, if applicable, the portability of that exemption. But for the great majority of our clients, who intend to live well beyond 2012, the temporary nature of the estate and gift tax changes means that they cannot be relied upon for planning purposes. Congress will revisit the estate, gift and GST taxes in late 2012, and we cannot predict what action it will take at that time.

Nevertheless, many of you have been reluctant to do any estate planning in light of the legislative uncertainty and the possibility of estate tax repeal. Now that we know that the estate tax will be with us for at least another two years, the time is ripe to do the planning that you have been putting off. Specifically, we believe that taking advantage of the new $5.0 million gift tax exemption is critical. The possibility of a decrease in exemption limits in the future years warrants taking advantage of this Congressional “gift” now.

American Association For Cancer Research

American Heart Association

Bloodless Medicine and Surgery Network provides information, links, stories on bloodless medicine and surgery

CancerGuide is dedicated to helping you find the answers to your questions about cancer, and especially to helping you find the questions you need to ask.

CancerNet – The National Cancer Institute’s gateway to the most recent and accurate cancer information.

Coronado Skin Medical Center – home of the internationally acclaimed cosmetic surgery team of Drs. William and Kim Cook

Health A to Z – a family health site

HealthGate provides eHealth solutions to healthcare institutions, corporations and websites

InteliHealth – health information made accessible to the widest possible audience

Mayo Clinic Health Oasis – reliable information for a healthier life

MedExplorer – health and medical information center

Mental Health Net – the award-winning guide to mental health, psychology & psychiatry online

New England Journal of Medicine

PubMed – National Library of Medicine

RxList – The Internet drug index

The Teen Files

Wellness Web – the patient’s network

These sites are not maintained by Carpenter Benefits. Internet links are being provided as an additional source for consumer information. Inclusion of a link in our website does not imply an endorsement of the outside site.
Please use this Glossary of Insurance Terms to help you understand our industy.

Actuary – a mathematician in the insurance field. Responsible for calculating premiums, developing plans and defining underwriting risk.

Agent – a licensed individual who represents several insurance companies and sells their products.

Benefit – reimbursement for covered medical expenses as specified by the plan.

Brand-name drug – prescription drug which is marketed with a specific brand name by the company that manufactures it. May cost insured individuals a higher co-pay than generic drugs on some health plans. (see “generic.”)

Broker – a licensed insurance professional who obtains multiple quotes and plan information in the interest of his client.

Carrier – insurance company or HMO insuring the health plan. Certificate Booklet – the plan agreement. A printed description of the benefits and coverage provisions intended to explain the contractual arrangement between the carrier and the insured group or individual. May also be referred to as a policy booklet.

Claim – a formal request made by an insured person for the benefits provided by a policy. COBRA (Consolidated Omnibus Budget Reconciliation Act) – Federal legislation that requires group health plans to provide health plan members the opportunity to purchase continued coverage in the event their insurance is terminated. Applies only to employer groups with 20 or more employees. Learn more about COBRA at the Department of Labor’s website. – Please note this may take a few minutes to appear.

Co-insurance – the percentage of covered expenses an insured individual shares with the carrier. (i.e., for an 80/20 plan, the health plan member’s co-insurance is 20%.) If applicable, co-insurance applies after the insured pays the deductible and is only required up to the plan’s stop loss amount. (see “stop loss.”)

Co-pay/co-payment – the amount an insured individual must pay toward the cost of a particular benefit. For example, a plan might require a $10 co-pay for each doctor’s office visit.

Credit for prior coverage – any pre-existing condition waiting period met under an employer’s prior (qualifying) coverage will be credited to the current plan, if any interruption of coverage between the new and prior plans meets state guidelines.

Deductible – the dollar amount an insured individual must pay for covered expenses during a calendar year before the plan begins paying co-insurance benefits.

Dependents – usually the spouse and unmarried children (adopted, step or natural) of an employee. effective date – the date requested by an employer for insurance coverage to begin. exclusions – expenses which are not covered under an insurance plan. These are listed in the Certificate Booklet/Policy.

Explanation of Benefits (EOB) – a carrier’s written response to a claim for benefits. Sometimes accompanied by a benefits check. Generic drug the chemical equivalent to a “brand name drug.” These drugs cost less, and the savings is passed onto health plan members in the form of a lower co-pay. group insurance – an insurance contract made with an employer or other entity that covers individuals in the group.

Health Maintenance Organization (HMO) – An alternative to commercial insurance that stresses preventive care, early diagnosis and treatment on an outpatient basis. HMOs are licensed by the state to provide care for enrollees by contracting with specific health care providers to provide specified benefits. Many HMOs require enrollees to see a particular primary care physician (PCP) who will refer them to a specialist if deemed necessary.

HIPAA – Health Insurance Portability and Accountability Act of 1996, P.L. 104-91. This law relates to underwriting, pre-existing limitations, guaranteed renewal, COBRA and certification requirements in the event someone terminates from the plan. The new law, commonly known as the “Kennedy-Kassebaum Bill,” establishes new requirements for self-funded, fully-insured group plans (including church plans) and Individual Health policies. The purpose of the law is to: Improve portability and continuity of health insurance coverage in the group and individual markets To combat waste, fraud and abuse in health insurance and health care delivery To promote the use of medical savings accounts To improve access to long-term care services and coverage To simplify the administration of health insurance Learn more about HIPAA at the Department of Labor’s website. – Please note this may take a few minutes to appear.

Pre-certification – an insurance company requirement that an insured obtain pre-approval before being admitted to a hospital or receiving certain kinds of treatment. ID card/identification card – card given to insured individuals which advises medical providers that a patient is covered by a particular health insurance plan.

Indemnity insurance plans – traditional insurance plans (not HMOs or PPOs) which permit insured individuals to choose their doctors and hospitals. Insured individuals do not have to choose doctors or hospitals from a specific list of providers. Also called “fee-for-service” plans. in-network – describes a provider or health care facility which is part of a health plan’s network. When applicable, insured individuals usually pay less when using an in-network provider.

Lifetime maximum benefit – the maximum amount a health plan will pay in benefits to an insured individual. limitations – a restriction on the amount of benefits paid out for a particular covered expense.

Long-term disability (LTD) – insurance which pays employees a percentage of monthly earnings in the event of disability. managed care – the coordination of health care services in the attempt to produce high quality health care for the lowest possible cost. Examples are the use of primary care physicians as gatekeepers in HMO plans and pre-certification of care.

Multiple Employer Trust (MET) – an arrangement created to obtain health and other benefits for participating employer groups. Small employers can pool their contributions to receive the advantages of large group underwriting. network – a group of doctors, hospitals and other providers contracted to provide services to insured individuals for less than their usual fees. Provider networks can cover large geographic markets and/or a wide range of health care services. If a health plan uses a preferred provider network, insured individuals typically pay less for using a network provider.

Out-of-network – describes a provider or health care facility which is not part of a health plan’s network. Insured individuals usually pay more when using an out-of-network provider, if the plan uses a network.

Out-of-pocket maximum – the total of an insured individual’s co-insurance payments and co-payments. plan administration – overseeing the details and routine activities of installing and running a health plan, such as answering questions, enrolling new individuals for coverage, billing and collecting premiums, etc.

Point-of-service (POS) – health plan which allows the enrollee to choose HMO, PPO or indemnity coverage at the point of service (time the services are received).

Pre-certification – Pre-admission review and approval of appropriateness and medical necessity of hospitalization or other medical treatment. pre-existing condition – an illness, injury or condition for which the insured individual received medical advice, treatment, services or supplies; had diagnostic tests done or recommended; had medicines prescribed or recommended; or had symptoms of typically within 12 months (time periods may vary depending on state laws) prior to the effective date of insurance coverage.

Preferred Provider Organization (PPO) – A network or panel of physicians and hospitals that agrees to discount its normal fees in exchange for a high volume of patients. The insured individual can choose from among the physicians on the panel.

Premiums – payments to an insurance company providing coverage. provider – any person or entity providing health care services, including hospitals, physicians, home health agencies and nursing homes. Usually licensed by the state. referral within many managed care plans, transfer to specialty physician or specialty care by a primary care physician.

Rider – a modification to a Certificate of Insurance policy regarding clauses and provisions of a policy. A rider usually adds or excludes coverage.

Risk – uncertainty of financial loss. short-term medical – temporary health coverage for an individual for a short period of time, usually from 30 days to six months.

Small employer group – groups with 1 99 employees. The definition of small employer group may vary between states.

State mandated benefits – state laws requiring that commercial health insurance plans include specific benefits. stop-loss – the dollar amount of claims filed for eligible expenses at which the insurance begins to pay at 100% per insured individual. Stop-loss is reached when an insured individual has paid the deductible and reached the out-of-pocket maximum amount of co-insurance.

Third Party Administrator (TPA) – An organization responsible for marketing and administering small group and individual health plans. This includes collecting premiums, paying claims, providing administrative services and promoting products.

Underwriter – entity that assumes responsibility for the risk, issues insurance policies and receives premiums. waiver of coverage – a section on the enrollment form which states that an employee was offered insurance coverage but opted to waive this coverage.

Workers’ Compensation Insurance – insurance coverage for work-related illness and injury. All states require employers to carry this insurance.