New Estate and Gift Tax Law Set To Go Into Effect

It's official:  President Obama has signed into law new Estate and Gift Tax legislation that, while no providing complete repeal of the federal estate tax, does provide that all but the wealthiest estates will remain exempt from the imposition of federal estate taxes.  The fundamental provisions of the law are outlined here.

In my view, the most dramatic impact of the law is the new $5 million per person lifetime gift tax exemption.  Through 2010, lifetime non-charitable gifts (beyond the $13,000 per donee annual exemption gifts) made by any donor in excess of the cumulative sum of $1 million were subject to a gift tax at a rate of 35%.  In 2011 and 2012, donors can make cumulative gifts of $5 million without the imposition of any gift tax.  This hugely expanded amount will provide wonderful opportunities for owners of closely-held businesses and valuable real estate holdings to transfer those assets to their children and grandchildren without being subject to onerous gift taxes.  And, many clients will likely elect to make such transfers without relying upon valuation "discounts" that have forever been subject to IRS attacks.

If you have ever considered making large lifetime gifts to your loved-ones, the next two years might provide the best planning opportunities in our lifetime!

Congress Set To Vote on Dramatic Changes to Estate & Gift Taxes

After years of speculation, it is expected that before year's end Congress will vote on the compromise tax legislation hashed-out between President Obama and Congressional Republicans.  Incorporated in the legislation are dramatic changes to the federal estate & gift tax rules.  With much thanks to information disseminated by national expert Bob Keebler, here is a summary of the key modifications:

• The individual exemption amount for estate, gift and GST tax for 2010, 2011 and 2012 would be $5 million per person, $10 million per couple.
• The estate, gift and generation skipping tax rate will be 35% through 2012
• Beginning in 2011 the exemption amount will be indexed for inflation
• Estates of descendants dying in 2010 can choose either to apply the estate tax rules or the modified carryover basis rules that have been effect under the estate tax "repeal" for 2010
•  In a significant change from prior law, there will be "portability" of the individual estate tax exemption from one spouse to another; that is, a decedent's executor can transfer any unused exemption amount to the surviving spouse without the requirement that the deceased spouse's exemption amount pass into a credit shelter trust
• The estate and gift tax exemption will be "reunified" beginning in 2011

If it passes, the legislation will make only truly large estates subject to federal estate and gift tax liability.  Note, however, that for residents of states (like New York) that have "decoupled" from the federal estate tax regime, much smaller estates will remain subject to a state estate tax.  In New York, for example, the state estate tax exemption will continue to remain at $1 million per person. For a decedent with a $2 million estate, the New York State estate tax in 2011 would be $99,600.

Also, the new law will again "sunset" this time at the end of 2012.  So, depending upon which way the political winds blow, we could very well find ourselves in a similar state of uncertainly in 24 months. But in the meantime, the proposed legislation will provide a number of wonderful tax planning opportunities for larger estates.  And, those with "smaller" estates should not put-off estate planning even though they may believe they no longer have estate tax concerns. All the standard personal planning goals -- asset protection, divorce protection, catastrophic health protection, disability planning, long-term care planning -- remain as important as ever.

What the Return of the Federal Estate Tax Will Mean To You

Unless Congress enacts new estate tax legislation before December 31, the federal estate tax – which under the Bush 2001 tax laws was repealed for 2010 – will return with a vengeance in 2011.   Beginning January 1, estates for deceased individuals will be taxed at a rate of 55% for assets in excess of $1 million that pass to anyone other than a spouse.  Assets that pass to a spouse – either outright or in a qualified “marital deduction trust” – will qualify for the same “unlimited marital deduction” that existed under prior law.

The impact of a $1 million estate tax exemption will be dramatic for many estates.  For example, assume a widow residing in New York dies on December 31, 2010 with a $5 million taxable estate.  Her estate would be subject to payment of New York state estate tax of $391,600, leaving $4,608,400 to go to the widow’s heirs.  If she were to die on January 1, 2011, however, the total federal and New York state estate tax obligation would jump to $2,045,000, leaving $2,955,000 for the heirs.   

If the $1 million estate tax exemption in fact returns in 2011, here are a few key planning ideas for consideration:

• For married couples, your wills and/or living trusts should include estate tax planning clauses that allocate the maximum exemption amount to a “credit shelter trust” after the first spouse’s death.  This relatively simple strategy will ensure that each spouse will be able to use their respective $1 million exemption – thereby sheltering a full $2 million from federal and New York state estate tax.  One caveat is that each spouse (or their respective living trust) must individually own assets that will be made available for funding into the credit shelter trust after the first spouse’s death. If assets are owned jointly between spouses, the tax planning clauses will be rendered useless, since the jointly owned assets will pass automatically to the surviving spouse.
• For larger estates, life insurance held in an “irrevocable life insurance trust” will, in most cases, pass to the heirs exempt from both estate taxes and income taxes.   Life insurance held in this type of trust is especially helpful if a majority of your assets are illiquid, such as real estate or business interests.
• Couples (both married and unmarried) can use “spousal gifting trusts” that allow for the transfer of assets to each other that will be exempt from estate taxation in either partner’s estate. 
• Consider making annual gifts up to the exemption amount (currently $13,000 per year) to children, grandchildren or other desired beneficiaries.  Note that neither qualified medical expenses nor educational expenses (e.g., college or private school tuition) are subject to the $13,000 annual cap.

 Rarely in our nation’s history have we faced such a dramatic change in our estate tax law.  Given the ever-changing landscape, you’re well advised to seek competent professional advice to update your estate plan to ensure that both your tax and non-tax planning objectives are satisfied.