The new tax bill that Congress passed at the end of 2010 makes some very important changes to the federal estate and gift tax laws. Although these changes are only temporary (they apply only to the years 2011 and 2012), they provide some excellent estate planning opportunities.
The highlights of the new law are as follows:
• New Gift Tax and Generation Skipping Transfer Tax Exemption: You can now gift up to $5 million during your lifetime without paying any gift tax. Under the new law, for example, a married couple can gift up to $10 million (ideally to trusts) for the benefit of their children, and the initial gift, as well as all future appreciation on such gift, will pass generation to generation completely free from transfer taxes (i.e. no gift taxes, estate taxes, or generation-skipping taxes). In addition, if parents would like to retain some access to these assets, trusts can include one’s spouse as a potential beneficiary, so in a “rainy day” scenario, the spouse can still access income and even principal. If you can afford to take advantage of all or a portion of this lifetime exemption, you should act now since this provision is set to expire at the end of 2012. If you already used your $1 million exemption in a previous year, then you now have a $4 million lifetime exemption to work with.
Please note that the new lifetime exemption is distinct from the “annual exclusion,” which remains at $13,000 per donee. What that means is that in addition to the above $5 million lifetime exemption, you can still gift $13,000 to desired individuals (a married couple can gift $26,000) and such annual gifts will not reduce the $5 million lifetime exemption.
• New Estate Tax Exemption: There is no estate tax (or generation skipping transfer tax) on the first $5 million of assets not passing to a spouse (all assets passing to a surviving spouse who is a US citizen are exempt from estate tax due to the marital deduction). What that means is that a married couple can now shelter the first $10 million of assets passing to desired beneficiaries. Good news, but since most of us are not planning on dying in 2011 and 2012, this provision only provides more uncertainty for the future. Nevertheless, it makes sense to ensure that your current estate planning documents are structured to take advantage of the maximum estate tax exemption.
You should immediately revisit your estate plan in the following circumstances: (1) if you have children from a previous marriage, (2) the funding of certain trusts upon your death is dependent on the allocation of generation skipping transfer tax exemption, (3) your surviving spouse is not a beneficiary of both the credit shelter trust (also known as the by-pass trust) and the marital trust in your Will, or (4) you make certain bequests to charities that are based on formulas or percentages of a taxable estate.
• New Estate Tax Rate: The top federal estate tax rate is 35% (down from its peak rate of 55% in 2001). Again, good news, with the same caveat.
• Step-Up Basis: Estates of individuals who pass away in 2011 and 2012 will be entitled to a full step-up in basis, so no capital gains taxes will be owed on inherited assets. This eliminates 2010’s carry-over basis regime and the “accounting nightmare” of calculating basis on assets purchased decades ago.
• Portability: The $5 million estate tax exemption becomes “portable” so that if estate planning documents are not properly structured on the first spouse’s death (or assets are not properly titled), the surviving spouse will be able to utilize both spouses’ exemptions upon the surviving spouse’s death (if the appropriate box is checked on the first spouse’s estate tax return). Although this is good, it still makes sense to ensure that your assets are properly titled and your Wills at least enable the surviving spouse to set up a credit shelter trust, in order to: (i) avoid excess state estate taxes, (ii) take advantage of the deceased spouse’s exemption from generation skipping transfer tax (which is not portable), and (iii) ensure that all of the growth between the first and surviving spouse’s deaths can be excluded from the surviving spouse’s taxable estate.
• Clarity for 2010 Estates: Individuals who passed away in 2010, have the choice of paying no estate tax and operating under the carry-over basis laws (with the $1.3 million of step-up to allocate) or applying 2011’s new estate tax laws. This provides much needed clarity for 2010 estates.
• 2013 Sunset. Barring future Congressional action, this legislation will expire on January 1, 2013. As a result, the estate, gift and generation skipping transfer tax exemptions will revert to $1 million and the tax rate will revert to 55%.
Of course, each individual’s situation is different. Therefore, this summary of the tax laws should not be relied upon without first consulting an attorney. Please do not hesitate to call me with questions or to schedule a review of your current estate plan. I would be happy to discuss one or more of the opportunities presented above, or any other estate planning or business succession planning issue relevant to you.
U.S. Treasury Circular 230 Notice: Any tax advice provided in this communication is not intended or written to be used or relied upon, and it cannot be used, relied upon, or referred to by any taxpayer: (1) for the purpose of avoiding tax penalties that may be imposed by law upon the taxpayer; or (2) in any marketing or promotion of any tax transaction or planning. Any taxpayer should seek advice based on his/her particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter referenced in this communication. If you wish to contact me via email you can reach me at, email@example.com.