Client Update - Estate Tax Law

CLIENT UPDATE

On December 17, 2010 President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The Act significantly changes the Federal transfer tax as follows:

2010 Changes

• 2011 estate tax regime applies to those dying in 2010.
• Executors and trustees of decedents dying in 2010 must elect out of the 2011 estate tax regime in order to avoid all estate tax under the 2010 modified estate tax regime.
• Considerations: Generally, the 2011 estate tax regime is preferable for those people who died in 2010 and whose net assets total less than $5,000,000 (whether single or married). Generally, the 2010 modified estate tax regime is preferable for all others since no estate tax is due at death and unrealized gain is taxed to the beneficiary at capital gain rates when the inherited property is actually disposed at a later date.

2011-2012 Changes

• Increased Exemptions.
• Gift, estate and GST tax exemptions are equal at $5,000,000.
• Considerations. Possible to gift $5,000,000 ($10,000,000 for a married couple) and exclude all appreciation in the gift from estate tax at death. Consider lifetime gifts, forgive loans to family members, catch up on funding life insurance trust.
• Portability.
• The surviving spouse can utilize the unused portion of the deceased spouse’s estate tax exemption at his or her death.
• Considerations. Must file an estate tax return to compute the amount carried forward. IRS can audit the return at any time in order to recalculate the amount available. Not available if surviving spouse survives past 2012. Lost if surviving spouse remarries and survives new spouse. Does not apply to gift or GST tax exemptions. Asset appreciation prior to survivor’s death could have been sheltered at first spouse’s death.
• Temporary.
• Returns to 2001 law in 2013 (i.e. $1,000,000 exemption and 55% tax rate).
• Considerations. Two year window to take advantage of changes.

Not Changed

• Valuation Discounts. Valuation discounts can still be applied to restricted assets to reduce the fair market value for transfer tax purposes.
• Grantor Retained Annuity Trusts. Utilize short term trusts and take advantage of historically low interest rates to gift appreciated assets.