New Estate and Give Tax Laws

FOR IMMEDIATE RELEASE
Columbus, Ohio, United States of America (Free-Press-Release.com) November 24, 2011 -- The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”) significantly changes the federal estate and gift tax laws. This article summarizes the Act’s key changes and provides our observations about the Act’s impact from an estate planning perspective.

Estate Taxes

Before the Act, the federal estate tax was gradually reduced over several years and then eliminated for decedents dying in 2010. Prior law provided that the estate tax, with a maximum tax rate of 55% and a $1 million estate tax exclusion amount, would be reinstated after 2010. The Act reinstates the estate tax for decedents dying during 2010, but at a significantly higher estate tax exclusion amount of $5 million, and a lower maximum tax rate of 35%, than under prior law. These estate tax laws continue for decedents dying in 2011 and 2012. Unfortunately, the new laws are temporary and will expire on December 31, 2012, and the prior estate tax laws, with a 55% maximum estate tax rate and a $1 million estate tax exclusion amount, are reinstated at that time.

The Act also provides for “portability” between spouses of the estate tax exclusion amount for estates of decedents dying in 2011 and 2012 if both spouses die before 2013. Generally, portability allows surviving spouses to take advantage of the unused portion of the estate tax exclusion amount of their predeceased spouses, thereby providing surviving spouses with a larger exclusion amount. Special limits apply to decedents with multiple predeceased spouses.

Gift Taxes

For gifts made in 2011 and 2012, the Act limits the maximum gift tax rate to 35% and increases the gift tax exclusion amount to $5 million. As discussed below, this change provides an opportunity to move significant amounts of wealth free of estate and gift taxes. Donors continue to be able to use the annual gift tax exclusion before having to use any part of their lifetime gift tax exclusion amount. The annual exclusion amount is $13,000 per donee (married couples may continue to “split” their gift and may make combined gifts of $26,000 to each donee).

Observations Regarding the Act
The estate and gift tax provisions of the Act are very favorable because of the substantial increase in the estate tax exclusion amount ($5 million) and the lower estate and gift tax rate (35%).

The Act is a temporary fix, which expires on December 31, 2012, immediately after the next election cycle. It is impossible to predict whether it will be extended in either its current or some modified form, especially given the fact that taxes are a hot-button issue with both major political parties. If Congress fails to act, the Act will lapse and the estate tax will revert to what it would have been under prior law (i.e., $1 million estate tax exclusion amount and 55% maximum estate and gift tax rate).

From 2001-2010, the exclusion amount for gift tax purposes has been $1 million. The Act increases this to $5 million, or $10 million per married couple. This change provides an unprecedented opportunity to move substantial amounts of wealth out of individuals’ estates. Given the fact that the Act will expire without further Congressional action in 2012, we are advising clients that it would be prudent to implement estate planning techniques utilizing lifetime gifts before the December 31, 2012, expiration date.

One of the more notable provisions contained within the Act is the “portability” provision, which provides that if one spouse does not fully utilize his/her entire $5 million estate tax exclusion amount, the unused portion can be used by the surviving spouse’s estate. The initial reaction is that portability avoids the need for trusts (so called Marital/Family or A/B trusts) that are designed to take full advantage of the estate tax exclusion amount in both spouses’ estates. However, both spouses must die before 2013 in order to benefit from the portability provision. Further, these trusts continue to provide the following significant additional benefits beyond just the use of each spouse’s estate tax exclusion amounts:

 Ensuring that assets contained in the trusts pass to children of the couple and not to any new spouse of the surviving spouse or others.

 Ensuring that appreciation on the assets in the trust, which may exceed the estate tax exclusion amount at the surviving spouse’s death, is not subject to estate tax at that time.

 Protection of assets in the trust from creditors of the surviving spouse, including any marital claims of future spouses.

Given the fact that the portability provision is scheduled to expire in 2012, as well as for the reasons stated above, for now we are advising clients to continue to use these trusts.

Summary

To summarize, the key changes discussed above include the following:

 The estate tax exclusion amount increases to $5 million per person for 2010 through 2012.

 The maximum estate and gift tax rate is reduced from 55% to 35% for 2011 and 2012.

 A “portability” provision is included, which allows surviving spouses to use any estate tax exclusion amount that is not used by the first spouse to pass away.

 The generation skipping tax (“GST”) exemption amount is increased to $5 million for 2010 through 2012.

 The Act expires at the end of 2012, thus making the foregoing changes temporary in nature. We recommend that clients review their estate plans periodically and/or whenever a significant event occurs (e.g., change in laws, birth of a child, death of a spouse, significant change in net worth, etc.).

For clients with substantial amounts of wealth and with closely held businesses, we highly recommend that such clients consider using lifetime gifts to take advantage of the current $5 million lifetime gift tax exclusion amount, which will expire absent further Congressional action at the end of 2012.
Please do not hesitate to contact us with any questions that you might have or if you would like to discuss your estate plan in light of the Act.

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