September 20, 2011

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Estate and Gift Tax Law Changes and Opportunities

It seems that Congress never stops revising the Estate and Gift Tax Laws.  Although Congress actions (or inaction depending on how you look at it) leads to much uncertainty for your estate and gift planning, it also creates planning opportunities.

What Has Changed in the Estate and Gift Tax Law:

1. The exemption from Federal Estate and Gift Tax is now $5,000,000 per person for 2011 and 2012.  The exemption was $3,500,000 per person in 2009.  Remember that in 2010 there was a repeal of the Estate Tax, and, accordingly, no Estate Tax exemption was applicable.  Unless Congress acts by the end of 2012, the exemption will be reduced to $1,000,000 per person in 2013 and future years.  If 2010 was the model for congressional action concerning the Estate and Gift Tax Law, we will not know what the law will be for 2013 until late in 2012 or possibly early in 2013.

2. The lifetime gift exemption is $5,000,000 per person for 2011 and 2012.  Use of the lifetime exemption reduces the exemption remaining at death.  Under prior law, the lifetime exemption was limited to $1,000,000 per person, notwithstanding that the exemption available at death was greater than $1,000,000.  For example, in 2009 the exemption at death was $3,500,000 per person.

3. The Estate Tax exemption is portable between spouses for 2011 and 2012.  This means that when one spouse dies their remaining exemption may pass to the surviving spouse.  But, we caution you that there are technical problems with portability of the exemption if the estate is anticipated to appreciate or there is a remarriage following the death of the first spouse.  As a result of these issues and the temporary nature of portability, in most cases, we do not recommend reliance on portability as the main focus of our clients' planning.

4. The generation skipping tax exemption has also been increased to $5,000,000 for 2011 and 2012.  Unlike the Estate Tax, the generation skipping tax exemption is not portable.  Nevertheless, this significant increase in the exemption makes it very advantageous to make gifts to grandchildren and great grandchildren in 2011 and 2012.

Planning Opportunities:

1. In certain cases, if the value of estates, including anticipated appreciation, is less than the combined exemption, it may be that more simplified planning is appropriate for some clients.  For example, wills that pass the entire estate to a surviving spouse.

2. Lifetime gifting opportunities are greatly expanded with the increased lifetime exemption to $5,000,000 per person.  These gifting opportunities are particularly advantageous in the current low-interest rate environment and relatively low valuation for certain asset classes.  Accordingly, there may be a window in 2011 and 2012 for family gift planning. 
Some gift techniques to consider include:

  • Formation of family entities such as limited partnerships and limited liability companies.  The use of discounts for valuation purposes in family entity transactions is still permitted under current law.  Family entities facilitate in many respects the engagement of multi-generations in family businesses.  Family entities often have family oriented goals such as collective management of family assets, retention of control of family assets, collective investment goals, facilitation of family gifting, shifting of wealth to younger generations, restriction of non-family ownership, protection of creditor claims, reduction of family succession costs, promotion of family knowledge and communication about family assets.
  • Transfer of assets to Grantor Retained Annuity Trusts ("GRAT").  A GRAT can have significant family planning and wealth preservation and still retain cash flow and control to the senior generation.
  • Transfer of assets to grantor trusts in a sale transaction ignored for income tax purposes.  The use of grantor trusts has both estate tax advantages by passing appreciation to lower generations and preserving favorable income tax benefits.  For example, the grantor of the trust can pay income tax on earnings that ultimately pass to other family members.
  • Put today's low real estate valuations to use for you by putting your home in a qualified personal residence trust that allows you to remain in the home and shifts the value and appreciation to your children or other family members.
  • Intra-family loans are an easy and simple way to pass wealth to children and grandchildren in today's low interest rate environment.
  • Consider the use of the increased exemption in 2011 and 2012 by creation of a multi-generation trust exempt from the Generation Skipping Tax.

Flexibility in your estate planning documents is more important than ever.  With the increased exemption to $5,000,000 per person, it may be more advantageous in certain situations to have assets included in estates to obtain favorable income tax benefits, such as a step-up in basis.  In addition, flexible distribution provisions to a surviving spouse and descendants may be important to deal with issues in future tax laws.
We will be happy to review your estate planning to see how these new tax law changes and the planning opportuinites may impact your particular circumstances.  Please contact our estate planning group to discuss these opportunities.


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