Unmarried Couples and the New Federal Estate Tax

The federal estate tax is back in effect as of January 1, 2011. Originally, the tax was to apply to all estates over $1 million, at a top rate of 55%. As a result of a last minute compromise in Congress, the federal estate tax will temporarily be reduced for two years. In 2011 and 2012, the estate tax will apply to estates over $5 million at a top rate of 35%.

Unmarried, cohabitating individuals may be facing a significant problem under the new provisions. Under federal law, a person who dies can leave an unlimited amount of assets to a U.S. citizen spouse without any of it being subject to the estate tax at the time of his or her death (assets bequeathed to a non-U.S. citizen spouse do not receive this unlimited exemption and special planning is required in these cases). But if you leave money or property to someone you live with but are not legally married to, the same rules do not apply. If the total value of all your assets when you die is more than the estate tax exemption amount, then there most likely will be estate taxes. For this reason, many unmarried couples face much more difficult tax issues than married couples and should consult with a financial advisor or attorney knowledgeable in estate planning and familiar with the new rules.

Same-sex couples also run into issues. They may live in states that allow them to marry or have civil unions in which they are treated the same as married couples for tax purposes, but that only applies to state taxes. The federal government does not currently recognize same-sex marriages or civil unions for the purposes of federal taxes, so couples need to take extra care now that the federal estate tax is back in full effect.

Private Letter Ruling 201110014

"Matt" maintained an IRA with his bank, but decided to withdraw an amount of money from that IRA and deposit it into an account at a separate bank.

Why did "Matt" make the withdrawal?

It was based on his belief that the initial bank would fail to stay financially solvent, and he was afraid of losing his savings. He spoke to an individual at the second bank who incorrectly told him he had 90 days to rollover the retirement funds into another IRA without penalty and he should take that time to evaluate the financial stability of his current bank.

"Matt" relied on this individual’s advice. He did take a small amount of the money he withdrew from the IRA to reduce the interest expense on a bank credit line. When his first bank’s financial condition subsequently improved, he deposited the initially-withdrawn funds into a SEP IRA account. However, he made this rollover after the 60-day requirement, finding out about his error in a notice from the Internal Revenue Service.

"Matt" filed a PLR and it was determined that he was given incorrect information that resulted in his failure to accomplish a rollover in the proper time frame. The 60-day rollover requirement was waived in this case, and the rollover to SEP IRA was treated as a valid rollover contribution.

LESSON TO LEARN:
Double check the accuracy of information... and then check it again. In this case, "Matt" didn’t discover the problem until he was contacted by the IRS, which you don’t want contacting you on IRA matters. Make sure you work with a competent financial advisor to get all questions answered correctly.