- Estate Planning Window of Opportunity Opens Wide!
- January 14, 2011 | Authors: Thomas E. Peckham; David L. Silvian
- Law Firm: Bingham McCutchen LLP - Boston Office
Important Note: Unless the law is amended, this window of opportunity will slam shut at the end of 2012, when top tax rates will return to 55% and exemptions will be reduced to roughly $1 million.
At least for the years 2011 and 2012, the federal estate tax exemption is $5 million and the federal estate tax rate is 35%. Beginning in 2012, the $5 million exemption will be indexed for inflation. This is good news for our clients but keep in mind that Massachusetts, Maine, New York, Connecticut and many other states continue to have their own state death taxes that need to be taken into account. For example, a Massachusetts estate of over $10.1 million could owe tax at a marginal rate of more than 45% when both state and federal estate taxes are taken into account. A Massachusetts estate of $5 million may not owe any federal estate tax but would owe nearly $400,000 in Massachusetts estate tax.
Perhaps the most unexpected provision of the new law is the increase of the lifetime gift tax exemption to $5 million, indexed for inflation beginning in 2012. The gift tax rate is 35%. These changes are only in effect for 2011 and 2012 under current law.
Clients who have not made prior taxable gifts can now give up to $5 million ($10 million for a couple who split gifts) free of any federal gift tax. Even clients who used up their old $1 million lifetime gift tax exemptions will be able to give $4 million ($8 million for a couple) free of any federal gift tax.
We expect that many of our clients will want to make large gifts in the next two years.
In addition to other motivations, lifetime gifts will help to reduce or eliminate state death taxes in Massachusetts and other states.
Consult with your estate planning attorney before making large gifts — there are many factors to take into account, including what trusts are appropriate recipients, the effect of gifts on the existing estate plan, income tax factors, the possible impact of gifts on post-2012 estates, and in some states, including Connecticut, state gift taxes.
Generation Skipping Transfer Tax
The generation skipping transfer (“GST”) tax exemption is also $5 million for 2011 and 2012, indexed for inflation beginning in 2012, with a 35% GST tax rate. The GST tax is imposed on transfers of assets that skip a generation.
If you have already established irrevocable trusts that are potentially subject to the GST tax, you may wish to allocate GST exemption to those trusts.
Examples include trusts that were funded from the proceeds of a Grantor Retained Annuity Trust (GRAT) or a Qualified Personal Residence Trust (QPRT).
You may wish to take advantage of the increased exemption by making new gifts to an irrevocable generation skipping trust.
If a person dies in 2011 or 2012 leaving a surviving spouse, the surviving spouse can “inherit” the first spouse’s unused federal estate tax exemption. The surviving spouse will be able to add that exemption to her own for gift and estate tax purposes. Note that portability is not automatic — a return must be filed in the first estate — and this provision sunsets after 2012. While portability does not eliminate the need for estate planning, it will reduce or eliminate the federal estate tax in some cases.
Sunset in 2013
Unfortunately, Congress did not come up with a permanent solution and the new tax law is generally effective only through the end of 2012. In 2013, without further action by Congress, the federal estate, gift and GST taxes will “sunset,” returning to the way they were in 2000, with higher rates, lower exemptions and no portability, among other things. What Congress will do as 2013 approaches is anyone’s guess. If recent experience provides any guidance, we won’t know what 2013 will bring until the very end of 2012 or the beginning of 2013!
Should I Call My Estate Planning Attorney?
Well, yes! Most of our estate plans are designed to achieve good estate tax results even as exemptions and rates change. However, estate planning always involves balancing the client’s wishes for his or her family, friends and/or charities with federal estate tax, state estate tax (if applicable), income tax and other considerations. This major change in the law alters that balance and the only way to be confident that your plan is the right one is to ask your attorney to review it.
In addition to reviewing the terms of estate planning documents, it is always important to periodically review the allocation of family assets between individuals, their spouses, their trusts and business entities, including family limited partnerships (FLPs) and limited liability companies (LLCs). This type of review takes on added importance when there is a major change in the law.
The new law also made major changes that will affect administration of estates of decedents dying in 2010 and elections to be made with respect to some gifts and trust distributions made in 2010.