We need to advise you of important changes in the federal tax laws. Do not rely on this information without a detailed conference with our attorneys as there are numerous exceptions to these rules and taxes.
I. ESTATE, GIFT and GST TAXES
As a result of the 2001 Tax Act (“EGTRRA”) and subsequent Congressional inaction, on January 1, 2011 the federal estate tax and GST tax was scheduled to revert back to the 2001 levels ($1 million exemption per person and tax rates ranging from 37% to potentially as high as 60%).
Congress has now acted!
- For a two-year period, the federal estate tax and GST tax will allow for a $5 million (indexed for inflation) exemption per person and a flat 35% tax rate above the exemption.
- The new law allows for “portability” whereby spouses will be allowed to share their estate tax exemptions (i.e., $5 million each) such that the surviving spouse could utilize the deceased spouse‘s unused exemption, regardless of the structure of the deceased spouse‘s estate plan or whether any assets were owned by the deceased spouse.
- The gift tax exemption amount has increased to $5 million per person with a flat 35% gift tax rate on gifts above the exemption. Essentially, the legislation has “Reunified” the estate, GST and gift tax exemption amounts.
- All assets included in a decedent‘s taxable estate will receive a “step-up” in cost basis to their fair market value as of the decedent‘s date of death.
Commentary and Thoughts
- Those estate plans currently structured to leave the maximum federal estate tax exemption (which will now equal $5 million) to individuals other than a spouse (i.e., to children or others) should be reviewed to be sure that the surviving spouse is left with sufficient funds to provide for his/her financial security.
- Under “portability”, it may initially appear that the first spouse to die will not have to create a separate so-called “credit shelter” trust to capture the federal estate tax exemption amount. However, many people who live in states that have “decoupled” their estate tax system from the federal estate tax system (such as Massachusetts with its $1 million per person estate tax exemption amount) will continue to find the use of trusts critical to mitigating state estate tax exposure.
- “Reunification” of the estate, GST and gift tax exemptions (for 2011 and 2012) creates additional lifetime planning opportunities even for those who have already exhausted their lifetime credit as individuals will now have an additional $4 million, $8 million if married, of gifting capacity to more efficiently transfer wealth during lifetime (thereby shifting appreciation out of the estate). When coupled with supportable valuation discounts on closely-held assets, the results of these types of lifetime transfers can be dramatic. Furthermore, this additional lifetime gifting “capacity” can also be used as additional “seed capital” to leverage any new or existing “Sales to Intentionally Defective Grantor Trust” strategies.
- Regardless of the status of the estate tax laws, there are many non-tax reasons to keep your estate plan current. Planning for: incapacity, second marriages, philanthropy, children with disabilities, spendthrift children, change of domicile or citizenship, asset protection, as well as planning for dynamic family situations and business succession concerns can be just as important, if not more so, than the traditional tax planning considerations.
II. SPECIAL BASIS RULES FOR 2010 ESTATES
For the estates of decedents dying in 2010, the basis of assets acquired from the decedent is
the lesser of the decedent’s adjusted basis (carryover basis) or the fair market value of the property on the date of the decedent’s death.
However, there are
two important
exceptions to this general rule: (1) the executor can allocate up to $1.3 million to
increase the basis of assets; and (2) the executor can also allocate an additional amount, up to $3 million, to
increase the basis of assets passing either outright to a surviving spouse or to a trust that qualifies for a qualified terminable interest property (QTIP) election. The allocations of the “general” basis increase and the “spousal property” basis increase
must be made by the executor on a special IRS Form and this information also
must be reported to estate beneficiaries.
Please note: The new legislation gives executors the choice of using the 2010 rules (no federal estate, partial step-up in basis) or the 2011 rules ($5 million exemption, full basis step-up) and has extended the filing deadlines for these elections until September 2011. Accordingly, careful consideration should be given when evaluating which choice is appropriate.
III. CONCLUSION
We continue to emphasize that an estate plan is not a plan for all time and needs to be reviewed periodically to address changes in your marital staus, your family structure, your assets, your dispositive wishes, market conditions and the tax laws. Changes in the foregoing can have a dramatic impact on your estate plan.
We hope the foregoing has been informative. As always, we continue to be here to answer any questions and assist you with your planning needs.