The New Federal Estate Tax Law: Double Coupon Day

The new federal estate tax law has “double coupon day” and, if you’re like most people, double coupon day gets your attention.  Every individual has a large coupon worth $5,000,000.  Married couples have a double coupon worth $10,000,000; hence:  The new federal estate tax law’s “double coupon day.”

Here’s how it works

The transfer of your assets to your beneficiaries is a taxable event.  It’s like standing in the checkout line at the IRS store.  You put all of your assets on the conveyer belt and the IRS sales clerk rings them up.  She says, “You have $2,500,000 worth of assets and you owe tax on them.” 

You smile and reply happily, “Okay.  I’ll use my coupon to pay the federal estate tax.  Thank you very much.”  Your assets are transferred to your beneficiaries and no out of pocket dollars have been used to pay for the federal estate tax.

Double coupon day

A married couple enjoys double coupon day.  So, in the above scenario, only $2,500,000 of the $10,000,000 coupon for married couples has been used.  So, when your spouse dies, he or she can place another $7,500,000 worth of assets on the IRS conveyer belt and pay for the taxes with the remaining coupon.

The catch

If it sounds too good to be true, it is, unless you and your spouse both die in 2011 or 2012.  In 2013, your coupon is drastically reduced to $1,000,000 per individual.  So, at the IRS checkout counter, you can only pay the taxes on $1,000,000 worth of assets with your coupon.

What’s taxed

The federal estate tax is a tax on everything you own:  retirement accounts, home, business, life insurance, investment accounts, bank accounts, other investments, and personal property. 

The result

And while most people will not be affected by the tax in 2011 and 2012 because of the large coupon, many people will be affected in 2013 and beyond when the coupon is reduced to $1,000,000.

If you have questions about the federal estate tax or about avoiding the federal estate tax with advanced planning, consult with a qualified estate planning attorney.