Estate Planning After the 2010 Tax Legislation
January 19, 2011
The new tax law enacted at the end of 2010 significantly modifies the system of Federal estate, gift and generation-skipping transfer (“GST”) taxation.
Notably, in 2011 and 2012, the Federal estate, gift and GST tax exemptions are $5 million (with the exemptions indexed for inflation in 2012), and the Federal estate, gift and GST tax rates are 35%. Additionally, the Federal estate tax exemption (but not the GST exemption) is generally made “portable” between spouses, meaning that the unused estate tax exemption of a deceased spouse will be available in most circumstances to the surviving spouse.
The new tax law sunsets at the end of 2012. As a result, on January 1, 2013, the Federal estate, gift and GST tax exemptions are scheduled to revert to their 2001 level of $1 million (with the GST exemption indexed for inflation), and the maximum Federal estate, gift and GST tax rates are scheduled to revert to a top bracket of 55%.
Please click here to view our Alert Memo, which provides an overview of the new Federal estate, gift and GST tax landscape in the wake of the enactment of the new legislation. The memorandum also discusses general estate, gift and GST tax planning, including specialized estate planning techniques designed to transfer the investment return on assets to children and more remote issue, such as sales or loans to grantor trusts, grantor retained annuity trusts (“GRATs”), charitable lead annuity trusts (“CLATs”) and qualified personal residence trusts (“QPRTs”). Click here to view a chart summarizing the changes to the Federal transfer tax regime from 2010 through 2013.
Below are our general recommendations in light of the changes to the Federal estate, gift and GST tax laws.
Gift of increased gift tax exemption
Some clients may wish to make taxable gifts over the next two years to use the full $5 million Federal gift tax exemption (or $10 million for married couples who split gifts). A gift of the Federal gift tax exemption would have a number of benefits, including the following:
- A gift of the Federal gift tax exemption will remove the investment return on the transferred property from the date of the gift until the donor’s death from the donor’s estate tax base.
- In states such as New York and New Jersey, which have an estate tax but no gift tax, a gift of the Federal gift tax exemption will avoid the imposition of a state estate tax on both the transferred property and the investment return on such property.
Review current estate plans
Each client should review his or her estate plan to determine whether any changes should be made to take into account the new tax law changes. In particular, clients should consider the following:
- Each spouse should have sufficient assets in his or her name to make full use of the $5 million Federal estate tax exemption unless the couple wishes to rely on the new rules for portability of the deceased spouse’s estate tax exemption.
- Wills should be reviewed to determine whether a formula gift of the full $5 million Federal estate tax exemption (or, in some estate plans, the full $5 million Federal GST exemption) may result in an undesirably large portion of the decedent’s estate being diverted from a surviving spouse (or children).
- Married couples should consider whether it would be appropriate to take advantage of the new portability feature of the Federal estate tax exemption. As discussed further in the Alert Memo, there are still significant benefits to establishing a by-pass trust on the first death, rather than relying on portability. However, in some states, including New York and New Jersey, relying on portability would avoid the imposition of a state estate tax of up to approximately $390,000 on the death of the first spouse to die.
Allocation of increased GST exemption
Clients who have created trusts that are not exempt from the Federal GST tax should consider making an allocation of the increased Federal GST exemption to such trusts.
Continued Use of GRATs
Despite numerous proposals in 2010, the new tax law did not impose a minimum 10-year term for GRATs. Therefore, clients may continue to use short-term GRATs to pass investment growth to children without the imposition of a gift tax.
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As noted above, the new tax law presents an opportunity for clients interested in taking advantage of the increased $5 million Federal gift tax exemption to shift wealth gift tax free to children or more remote issue before the law sunsets at the end of 2012. A gift of the Federal gift tax exemption may be enhanced through the use of various techniques summarized in the Alert Memo. Further, clients should review their testamentary estate plans in light of these tax law changes.
Please contact any of the attorneys in our Private Clients and Charitable Organizations Practice Group if you have any questions about this Alert Memo.