By Ryan M. Wilson
The federal estate tax disappeared in 2010, and was scheduled to reappear on January 1 2011, with a $1 million exemption amount per person and a top tax rate of 55%. However, the recently enacted "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" (the Tax Relief Act) changed the landscape of estate, gift and generation-skipping transfer (GST) taxes. Under the Tax Relief Act, the federal estate tax comes back to life in 2011, but it is now imposed at the top tax rate of 35% of the estate's value after the first $5 million. This is a $4 million increase in the exemption amount.
The Tax Relief Act broadly changes the estate, gift and GST tax rules for 2010, 2011 and 2012, and then permits the old 2000 law to return in 2013. Without further legislative action, we are still scheduled to return to a 55% top estate and gift tax rate, a flat 55% GST tax rate, a $1million estate and gift tax exemption amount and a $1 million GST exemption amount (indexed for inflation). Thus, there is a two-year window during which certain estate planning opportunities will exist. In the interim, if these new changes become permanent, they will dramatically change the way in which estate planning is conducted.
Some of the key features of the Tax Relief Act include the following: (1) retroactively increase the estate exemption amount to $5 million for decedent's dying in 2010 - 2012; (2) retroactively reinstate the step-up basis rules for 2010 and beyond; (3) reunify the estate and gift taxes, so that the gift tax exemption amount goes to $5 million starting in 2011; (4) retroactively allow a $5 million GST exemption amount for transfers in 2010, as well as for transfers in 2011 and 2012; (5) permit the executor of the estate of a 2010 decedent to elect not to have the estate tax apply, and instead to have the estate subject to the carryover basis rules of the 2001 law; (6) index the estate tax, gift tax and GST tax exemption amounts after 2011; (7) permit the executor of a estate of a spouse who dies in 2011 and 2012 to elect to pass to the surviving spouse the deceased spouse's unused estate and gift exemption amount; and (8) postpone the sunset of the 2001 tax rules until January 1, 2013.
One of the principal concerns of the recently enacted Act is that it represents a temporary fix. At present, the old 2000 law is now set to return on January 1, 2013, our new day of reckoning. The lack of certainty is a serious issue for estate planning. Estate planning is a long-term venture by its very nature, and a reasonable level of stability is critical. Unfortunately, the failure of Congress to pass a permanent law will necessitate more changes down the road for estate planning. Be vigilant and stay flexible.
The real beneficiaries of the Tax Relief Act are the very rich. In terms of planning opportunities, large lifetime gifts are most favored under the Act. High net worth individuals with $10 - $20 million can take advantage of the new $5 million gift and GST exemption amounts. This opportunity may end in two (2) years, since there is no guarantee that the $5 million gift tax exemption amount will continue after December 31, 2012. Furthermore, there is also no guarantee that the $5 million GST tax exemption amount will continue, Thus, very wealthy individuals may want to consider dynasty or perpetual trusts that benefit future generations. However, one significant drawback to lifetime gifts is the carryover basis rule, i.e., the gift recipient has the same tax basis as the giver.
The Tax Relief Act also benefits those individuals who have estates over $1 million. Remember, we were set to return to the old 2000 law that included a $1 million estate exemption amount per person. So, the increase to $5 million per person means that most individuals will not have to worry about a federal estate tax for the next two years. (Note: there is currently no Michigan estate tax.)
With the new $5 million estate exemption amount, it is also anticipated that more couples will opt for joint trusts. However, it is important to be mindful that we are only looking at certainty for two years. So, before you consider terminating separate living trusts and using a joint trust, you need to consider the temporary nature of the current tax fix. In addition, while a deceased spouse's unused exemption amount can be transferred to the surviving spouse in 2011 and 2012, there is some uncertainty as to how it will be treated after December 31, 2012. Will the carryover disappear? It is also important to note that a decedent's unused GST exemption amount is not carried over to the surviving spouse, just the estate and gift exemption amount. An individual's GST exemption could be preserved in the individual's separate living trust.
In light of the higher exemption amounts, it is possible that more people will think they do not need estate planning, or go for a simpler plan. As a result, there could be a lack of disability and asset management planning and more probate estates. Regardless of the size of a person's estate, a durable power of attorney and a durable power of attorney for health care are essential documents.
The bottom line is that we continue to live in uncertain estate planning times. The $5 million estate exemption amount means that very few estates will pay federal estate tax in 2011 and 2012. There are some new planning opportunities under the Tax Relief Act, but they are mostly for the very wealthy and those inclined to make lifetime gifts.
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Ryan M. Wilson is an attorney with the law firm of Fraser, Trebilcock, Davis, & Dunlap PC in Lansing. Wilson practices in the areas of estate planning, probate, trust, and business law. This article is intended as a source of general information. If you have questions regarding this article, please contact Wilson at (517) 377-0897 or rwilson@fraserlawfirm.com.
© 2011 Fraser, Trebilcock,
Davis, & Dunlap PC
Published: Tue, Feb 15, 2011
