According to Census Bureau and National Stepfamily Resource Center statistics:

• More than half of marriages in the U.S. end in divorce
• About 75 percent who divorce will remarry
• About 65 percent of subsequent marriages involve children from previous relationships
• More than 40 percent of all U.S. adults have at least one step-relative, e.g., a stepchild, stepparent or step-grandchild

An untimely death or event leading to incapacitation can create a huge mess for those left behind. Adding a few stepchildren or a blended family dispute to the situation can make for years of legal wrangling over houses, family heirlooms and money.

Many remarried fathers and mothers want to provide for their children but not necessarily for their stepchildren. A grandparent may wish to provide for his or her children but not for their kids’ new spouses or stepchildren with whom they have no relationship. An adult may like his or her parent’s new spouse but may not want to be responsible for that stepparent after the parent’s death. Nevertheless, this may become a reality if a parent leaves the house to a child while giving the stepparent the right to live it until his or her own death.

When someone dies without a will in California, the surviving spouse may get everything — depending on whether property is community or separate property — and leave the children of the deceased with nothing. Avoiding the complications created by layers of blended families can be possible through careful and creative estate planning.

If you do not have an estate plan, regardless of the size of your estate, it is a good idea to consult with an attorney who is experienced with estate planning matters. A lawyer who is knowledgeable with wills and trusts can help you establish a plan to provide for your heirs.

Estate Tax

TRA 2010 changed the federal estate tax so that the first $5 million of an estate is tax-free (provided no taxable lifetime gifts had been made by the decedent) and the tax rate on anything above that amount is 35 percent. Formerly, only $1 million of an estate was tax-exempt and the tax rate ranged as high as 55 percent. Additionally, the law made it so that the estate tax and generation-skipping transfer tax as well as the gift tax exemptions are all indexed to inflation starting in 2012. As of Jan. 1, 2012, the exemptions are all $5.12 million.

Furthermore, married couples now may share any unused portion of the $5 million exemption (the so-called “portability” rule). For example, if one spouse dies and only has an estate worth $3 million, the other spouse can use the leftover $2 million in addition to his or her own $5 million exemption.

Generation-Skipping Transfer Tax

The generation-skipping transfer tax applies to assets that pass two generations or more. For example, if a grandparent leaves property to a grandchild as part of an estate plan, it is subject to this tax. Similar to the estate tax, the generation-skipping transfer tax exemption increased to $5.12 million, and any amount above that is also taxed at a 35 percent rate.

Gift Tax

TRA 2010 increased the amount that a person can give as a tax-free gift for 2011 to $5 Million, once again unifying the gift tax with the estate tax. Previously, the gift tax exemption had been locked in at $1 million. The new law also reduced the gift tax rate to 35%. As in the case of the estate and generation-skipping taxes, the gift tax exemption has been increased to $5.12 million for 2012 to account for inflation.

Consult an Attorney

Tax laws change frequently, and the changes can have a big and often adverse impact on a person’s estate plan. The new $5.12 million gift, estate and generation-skipping tax exemptions are scheduled to be reduced to $1 million effective January 1, 2013 (with inflation adjustment only for the generation-skipping tax). Thus, 2012 is the last opportunity for making large gifts unless and until the law changes again.

If you have not updated your estate plan recently, consult soon with an experienced estate planning lawyer who can review your circumstances and help you take advantage of current laws, maximizing the tax benefits that are now available.

Late in 2010, Congress and President Obama passed legislation unifying and increasing estate and gift tax exemptions for the next two years and preventing much higher tax rates that were scheduled to start in 2011. For at least 2011 and 2012, there is a $5 million exemption for estate and gift taxes per individual. For married couples the exemption is $10 million. In years prior to 2010, the gift tax exemption was much lower, which made it difficult to make large gifts to loved ones or charities without paying large amounts of taxes.

The act also raised the generation-skipping transfer tax (GST) exemption to $5 million. On January 1, 2013, that exemption will go back to $1 million. The GST tax usually applies to gifts to grandchildren.

What does all this mean? That this is an excellent time to pare down your estate.

Example

Frank has $7 million in assets. He has title to a vacation home valued at $3 million. In 2011 he decides to gift this home to his daughter.

The first $13,000 falls into the annual gift exclusion. The remaining 2,987,000 will apply to Frank’s lifetime gift tax exemption (which is $5 million). Clearly the gift falls within the lifetime gift exemption. In fact, Frank still has over $2 million left to give tax free or to apply to his estate tax exemption. If Frank gives no other large gifts, that means his estate will only be taxed for $2 million on his remaining $4 million in assets. Frank can also continue to gift $13,000 per year to his daughter that won’t count towards the estate tax exemption.

Giving the gift now is also beneficial to the child for other reasons. In addition to the exemptions, future appreciation of the gift will not count towards the estate and gift tax, which is why gifting property that is likely to appreciate in value is a good idea for estate tax purposes.

Review Your Estate Plan

If you haven’t revised your estate plan in the last few years, the estate and gift tax exemption is likely now much higher than when you last went to your attorney. It may be in your best interest to change certain things, especially if you have a living trust that tried to take advantage of the maximum possible earlier gift tax exemptions. Only an experienced estate planning attorney can give you advice on giving gifts for estate tax purposes.

Even if the new tax laws don’t apply to you, you can accomplish many things by having a will or trust in place. Speak with an estate planning attorney to review your situation and make sure you have provided as much as you can to your family, friends and important causes.