February 8, 2011
As you may know, the Federal government enacted a new tax act at the end of December 2010. This is an important law in many ways. It extends the 2001 and 2003 income tax “cuts” until the end of 2012. It also makes some significant changes to the estate, gift and generation-skipping transfer (GST) tax laws. This blog will discuss some of those changes.
The very good news is that almost all of the estate, gift and GST tax changes are favorable. However, these changes are temporary only and will expire at the end of next year (2012) unless Congress enacts other legislation. Because relying on Congress to the “right” thing is risky, we think it unwise for taxpayers to plan for the long run based upon these temporary law changes. Nonetheless, these changes suggest that all taxpayers review their estate plans as many plans may not accomplish the same goals under the new tax laws as the taxpayer might intend. Also, the temporary tax law changes provide significant planning opportunities which we wanted to bring to your attention.
The 2010 Act increased the estate, gift and GST tax exemptions to $5 million. However, under the law as written, those exemptions will drop to $1 million (somewhat higher for GST tax purposes) after 2012. Different sized exemptions can result in a significant shift in wealth depending upon when someone dies. If you already have estate planning documents, we suggest you have your documents reviewed to ensure they reflect your wishes no matter what your estate and GST tax exemptions are when your wealth passes to loved ones.
In addition, the top estate, gift and GST tax rates will be only 35% for this year and next year. Beginning in 2012, the rates are scheduled to increase to 55% (and 60% for some). The effective rate of estate and GST taxes also can result in significant changes in what each or your family members receive. We think it is appropriate for people to review their estate plans for the disposition of their property whether the rates of tax are very high or not.
Also, we think that it is appropriate for taxpayers to consider using their increased gift and GST tax exemptions soon. Obviously, for many people, a lifetime gift of $5 million is much too large. However, a smaller gift using a part of the larger exemption may be wise to consider. In addition, it is possible for some individuals to create trusts of which they could be a beneficiary but still keep the trust out of their taxable estates. If you are married, you and your spouse can use part of the $5 million gift and GST exemptions for each other (and other members of your family). This takes careful planning in the structure of trusts but, properly formed, trust assets can be made available for you and your spouse without causing the assets to be included in either of your taxable estates.
You may have read or heard that the 2010 Act allows a surviving spouse to inherit the unused estate tax exemption of the first spouse to die. Some articles in the popular press have contended that this opportunity simplifies estate tax for all but the most wealthy Americans. That simply is not true. First, the law that allows for the inheritance of the exemption by the surviving spouse expires at the end of 2012. So relying on it is not sensible in our view. Second, even if the inheritance of exemption law becomes permanent, we think it complicates rather than simplifies planning for almost every married couple.
I hope this information has been helpful to you. Mary Hart
