Posted: 15th April 2011 | Filed Under: Articles 

Dear Clients and Friends,

You have likely heard by now that President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Tax Act”) on December 17, 2010. The new law provided long-awaited guidance for the estate, gift and generation-skipping transfer (“GST”) tax law for 2010, but few observers could foresee all of the provisions of the bill that was finally enacted. The new law also contains many income tax provisions for individuals and businesses that extend the so-called “Bush Tax Cuts.” It includes important new provisions, including the following:

1. The New Tax Law is Temporary. The new 2010 Tax Law will expire on December 31, 2012. If Congress fails to act, by then, the estate, gift and GST tax law in effect prior to 2001 will be resurrected. That will mean a $1 million estate tax exemption and a maximum 55% graduated tax rate.

2. Estate Planning for 2011 and 2012. Beginning January 1, 2011, the estate, gift and GST tax exemptions are “reunified” at the same $5 million, with a single tax rate of 35 percent for cumulative transfers over the exemption amount. This is the lowest rate on estate and gift transfers since 1930. The $5 million exemption amount is indexed for inflation beginning in 2012. These changes are effective only for gifts made and deaths occurring in 2011 and 2012. At the end of 2012, they all expire. The temporary nature of this new law means that we will continue to have uncertainty in our estate and gift planning.

3. Portability of Estate Tax Exemption. For deaths in 2011 and 2012, there is a brand new concept: “Estate Tax Exemption Portability” between spouses. This “portability” presents an entirely new planning concept for married couples. With portability, the executor or trustee of the first deceased spouse may elect to pass the unused portion of the deceased spouse’s estate tax exemption to the surviving spouse, thereby increasing the surviving spouse’s estate and gift tax exemption. (However, the unused GST exemption of the deceased spouse is not portable). We believe that this new provision may open up interesting planning opportunities that we will be discussing with clients, but we are also careful to note that this may well disappear at the end of 2012, along with the other provisions of the new law.

4. Nonaction on GRATS and Discounted Intra-family Transfers. The previously proposed restrictions on Grantor Retained Annuity Trusts (GRATs) which, if enacted, would have required a minimum term of 10 years and a remainder value greater than zero, are not included in the 2010 Tax Act. Nor was there any action taken on various proposals to restrict or eliminate commonly used intra-family transactions such as family limited partnerships and installment sales to “defective grantor trusts” (DGTs). Therefore it appears that those vehicles will continue to be available for advanced wealth transfer opportunities.

We are in new territory with the 2010 Tax Act. Although many estate plans will continue to function as originally designed, such as the typical “A-B” trust plan, many others will require review and possibly, revisions. For example, a common formula GST provision in trusts that directs that “the maximum amount of the decedent’s available GST exemption that can pass free of GST tax shall be allocated to the grandchildren’s share” might end up containing the decedent’s entire estate if it were no more than $5 million. This could defeat the decedent’s desire to provide a limited amount to grandchildren with the balance of the estate to go to the surviving spouse or children.

Finally, the 2010 Tax Law opens up an unprecedented window for significant transfers to children and younger generations. With the $5 million exemption for lifetime gifts, families can now transfer substantial amounts of property to future generations free of gift, estate and GST tax. When combined with estate planning leveraging techniques like QPRTs (Qualified Personal Residence Trusts), GRATS, sales of DGTs, discounted gifts of fractional interests and the like, the results can be a very impressive tax-free transfer of wealth.

We look forward to working with you in this new era.

This publication is for general information purposes only and is not specific legal advice or a substitute for advice from qualified counsel. Pursuant to requirements related to practice before the Internal Revenue Service, we must inform you that any federal tax advice contained in this communication is not intended to and cannot be used for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any transaction or matter addressed herein.