New Laws Create Enormous Estate Planning Opportunities For The Wealthy

1. INDIVIDUALS WHO DIED IN 2010. Executors have the option of :
   1. A $5,000,000 federal estate tax exemption, with a 35% maximum estate tax rate on the assets in excess of $5,000,000 and a full step-up in basis on all assets in the estate as provided under prior law¹ or alternatively,
   2. Elect there be no federal estate tax, under the modified carry-over basis regime. Under the modified carry-over basis regime, the tax cost basis of assets that are inherited is the lesser of the decedent’s adjusted basis in the property or its fair market value on date of death, unless the Executor allocates some of the permissible $1,300,000 basis step-up to that property. (There is an additional $3,000,000 basis step-up for property passing to the surviving spouse).Under the Act, the $5,000,000 exemption is the default provision. Executors will need to ascertain which method is more beneficial. Note that for decedents dying after December 31, 2009 and before December 17, 2010, the estate tax return will be due no earlier than September 19, 2011.

      PLANNING SUGGESTION: Electing into the modified carry-over basis option regime is often advisable for estates significantly in excess of $5,000,000 where there will be a large estate tax at the second death. However, estate tax savings must be carefully weighed against potential capital gains taxes when those assets are ultimately sold.

2. INDIVIDUALS WHO DIE IN 2011 OR 2012. There is now a generous $5,000,000 federal exemption with a 35% maximum estate tax rate on the excess. In addition, for 2011 and 2012 a surviving spouse can use the unused portion of the estate tax exemption of his or her deceased spouse. This is referred to as the “portability” provision. The deceased spouse’s executor must file an estate tax return (even if not otherwise required to do so) and make the appropriate election to carry forward the exemption. Some may think the portability provision makes a “credit shelter trust” obsolete. However, this is not necessarily the case. It depends on the State estate tax. If a “state credit shelter” trust is not created on the death of the first spouse, there may be unnecessary State estate tax payable on the death of the survivor. The use of a “credit shelter trust” will also preserve the generation-skipping transfer tax (“GST tax”) exemption of the first spouse to die, since the GST exemption is not portable.PLANNING SUGGESTION: Meet with your estate planning attorney to determine whether your existing Will needs changing as a result of the new law and if a segregated State Credit Shelter Trust is appropriate.
3. PLANNING FOR 2011 AND 2012. For 2011 and 2012 the gift tax exemption is reunified with the estate tax exemption at $5,000,000. This is a dramatic increase from the $1,000,000 exemption in 2010. The maximum gift tax rate remains at 35%.PLANNING SUGGESTION: This is a great opportunity to make additional gifts if you have already used your $1,000,000 exemption. In addition, there is no New York or New Jersey gift tax, so a true tax-free transfer can be made. Since many states are suffering economically, there is a possibility that some states, including New York and/or New Jersey, may reinstitute their gift taxes. It therefore would be prudent (if you are inclined), to take advantage of the higher gift tax exemption sooner rather than wait and be subject to a potential gift tax as a result of a change in the law after 2012.

   For wealthy clients who have estates significantly in excess of $10,000,000, using the $5,000,000 gift and GST exemptions now can create huge opportunities when selling assets such as commercial real estate or closely held business to an Intentionally Defective Grantor Trust (“IDGT”).

   WARNING: For individuals whose estates are less than $10,000,000 it is critical to review your Will provisions. Many Wills have been drafted to leave the exemption amount directly to children. A provision such as this could result in the surviving spouse being disinherited. Please review your plan to make sure your estate planning documents and asset structure match your objectives.

4. GST EXEMPTION: For 2011 and 2012 the GST tax exemption has also increased to $5,000,000, with a maximum tax rate of 35%.PLANNING SUGGESTION: Careful use of the $5,000,000 GST exemption in 2011 and 2012 can result in passing significant assets to the grandchildren and more remote generations without any federal transfer taxes.
5. NO CHANGES TO GRAT RULES OR VALUATION DISCOUNTS. Significantly, the Act does not contain any provisions requiring a minimum term for grantor retained annuity trusts (“GRATs”). Therefore, short term GRATs continue to be a valuable estate planning tool. In addition, there are no provisions eliminating or curtailing valuation discounts for gift and estate tax purposes, so these continue to be an important component of estate plans.

SUMMARY:

The high gift and GST exemptions present significant estate planning opportunities, especially in the current economic environment where asset values and interest rates are very low. It should be noted that these changes apply only through December 31, 2012, and absent further legislation the law will revert to pre-2001 rates. Once again uncertainty reigns and it is recommended that you take advantage of these tremendous opportunities now.

• Credit Shelter Trusts continue to provide significant benefits.
• Clients with substantial wealth should consider using lifetime gifts to take advantage of the $5,000,000 gift tax exemption before it expires.
• For estates under $5,000,000, credit shelter trusts created under older Wills may unintentionally disinherit the surviving spouse.
• Implementing GRATs and sales to Intentionally Defective Grantor Trusts continue to be great planning techniques and can be enhanced under the new laws.

As required by new U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this post, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.