Estate Planning after 2010 Tax Act

The best holiday gift you get this year may just be the new “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” signed into law last week.  The law contains more taxpayer favorable provisions than we can adequately cover in a short article, including extension of the Bush-era tax cuts for two years, major estate and gift tax relief, and dozens of retroactively resuscitated and extended tax breaks for both individuals and businesses.  Most exciting for us are the estate and gift tax provisions in place for the next two years that will give our clients a unique opportunity to plan around the estate tax.  Below you will find the Act’s highlights we believe you should immediately become familiar with in order to make the most of all your future planning.

·         NEW ESTATE TAX EXEMPTION AMOUNT   –   Under the new Act, the estate tax exemption dramatically increases to $5 million and the top estate tax rate drops to 35% for 2010, 2011 and 2012.  A  decedent ‘s estate will retain a full step-up in basis for both its community half and the surviving spouse’s community half.

·         IN 2011 AND 2012, THE ESTATE, GIFT AND GST EXEMPTIONS ARE “UNIFIED” – The Act “unifies” the estate, gift and generation-skipping taxes for two years with a $5 million per person exemption for each of the three.  This is a welcome move by Congress that will open a two year window for taxpayers to make significant lifetime gifts to multiple generations tax-free.

·         THE ESTATE AND GIFT EXEMPTION IS PORTABLE – The law now allows the decedent’s unused balance of the $5 million estate tax exemption to be added to and used by a surviving spouse during the surviving spouse’s lifetime for gifts or at death for estate tax purposes.  An election must be made on the predeceased spouse’s estate tax return.  The GST exemption will not be portable to a surviving spouse, so it still requires a bypass trust in order to utilize both spouses’ GST exemptions.

·         RETROACTIVE ESTATE TAX FOR 2010 – For decedents dying in 2010, the estate tax is retroactively restored as described above.  However, the estate’s executor may elect to have no estate tax apply (the original 2010 estate tax law), but if so, there is carryover basis with only a limited step-up.

·         UNIQUE CHANCE TO AVOID GST IN 2010 – The GST tax exemption will be $5 million for 2010, but the GST tax rate remains at zero.  Consider transfers out of GST non-exempt trusts before year end, or make unlimited lifetime gifts to grandchildren with no GST tax (although gift tax still applies).  As noted above, the GST comes back in 2011 with a rate of 35% and an exemption of $5 million.

·         THE GRAT LIVES – The Grantor Retained Annuity Trust (GRAT) was expected to be a target in any new legislation passed this year because the planning technique permits significant shifts of wealth at very low gift tax values.  Fortunately, GRATs were not affected by the new law.

THE BOTTOM LINE: The new tax act offers many planning opportunities.  The key message is to take advantage of them now, while this two year window exists.  After two years, the exemption goes back to $1,000,000, and the top rate goes back to 55%, unless Congress takes action otherwise.