Tax Alert: Tax Relief Act Provides Numerous Opportunities for Aggressive Trust and Estate Planning Strategies
3/03/2011
As you know by now, on December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“the Act”), which not only extends Bush-era tax cuts through 2012 but also includes significant gift and estate planning opportunities.
We believe that these changes make this the optimal time to aggressively plan or readdress various trust and estate issues.
Click here to view a summary of the major provisions for reference.
Key Points to Consider
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Increased Exemptions: Estate tax exemption amounts have been increased to $5 million per individual and $10 million per married couple for 2011 and 2012, and the top tax rate for estates in excess of the exemption amount will decrease to 35 percent. Concurrently, since the gift tax has been reunified with the estate tax, an individual's $5 million exemption (again, $10 million for a married couple) may be used for gifts during life or for assets passing upon death. Lifetime gifts over $5 million will be taxed at 35 percent.
Further, there is a $5 million generation-skipping tax (“GST”) exemption for 2010 - 2012. GST gifts above $5 million made in 2010 were taxed at a zero rate, so those impacted were not subject to this tax but were subject to gift tax if they exceeded the $1 million gift tax exemption.
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Portability: New portability rules allow a surviving spouse’s estate to use any unused Federal estate and gift tax exemption. For example, if a husband dies survived by his wife and his estate only needed to use $3.5 million of his exemption, his wife can combine the unused portion of $1.5 million with her $5 million exemption, thereby passing an additional $6.5 million estate tax free.
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Special One-Time Relief Provision: The executor for decedents who died in 2010 (for the most part) can choose between (a) the Federal estate tax (with a $5 million exemption and 35 percent top rate) and a stepped-up income tax basis for estate assets, or (b) no Federal estate tax but application of the carryover basis regime.
We encourage conversations about other issues that arise from the tax cut extensions, including:
- Every will, revocable trust, and powers of attorney should be reviewed for formula clauses and percentage allocations, among other things that may no longer work as expected.
- State transfer taxes must be carefully considered as they have a significant impact on costs and payments.
- Portability should be considered in prenuptial agreements. Many prenuptial agreements include formula clauses that were never addressed in 2009 or early 2010 to deal with repeal. These too should be reviewed to ascertain whether the $5 million exclusion undermines their intent.
- Should you continue rolling GRATs or just make outright gifts?
- Can you eliminate or lessen guarantees on trust obligations by adding additional gifts to the trust using the new $5 million exclusion?
- What role should discounted gifts play in your estate planning strategy?
- Is it worthwhile to freeze assets now to remove future appreciation from an estate?
- There can be a great benefit to setting up a lifetime spousal bypass trust or a lifetime QTIP Trust.
- Is it time to gift higher cash value policies to an irrevocable life insurance trust, something that could not have been done in the past due to the lower gift tax exemption?
The extensions will not last forever but present an ideal opportunity to work with your J.H. Cohn advisor to ensure that your trusts and estate are set up to maximize the current opportunities.
For more information please contact Ira Herman, CPA, a J.H. Cohn partner and director of the Firm’s Trust and Estate Practice, at iherman@jhcohn.com or 973-618-6245, or your J.H. Cohn engagement partner at 877-704-3500.
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