Planning Opportunities Under the New Estate and Gift Tax Law

On December 17, 2010, Congress enacted a new tax law which changes the federal gift, estate and generation-skipping transfer (“GST”) taxes currently in effect. However, the new law is only effective for the next two years, through December 31, 2012. The new law increases the lifetime exemptions for the estate, GST and gift taxes to $5,000,000 per person and reduces the top tax rate to 35%.

The increased gift tax exemption allows you to make tax-free gifts of your estate which might otherwise be subject to gift tax. The new gift tax provisions allow someone who has already made taxable gifts totaling $1,000,000 during his or her life to have an additional $4,000,000 of gift tax exemption available for his or her use. This is an immediate planning opportunity for those who wish to take advantage of the tax law changes.

The new law may also alter many estate plans. For example, assume your estate is to be divided into a family trust and a marital trust with the family trust being funded with the maximum estate tax exemption and the marital trust being funded with the amount, if any, of the estate that exceeds the exemption amount. Thus, under current law, the family trust would be funded with the first $5,000,000 of the estate (or the entire estate depending upon the estate’s value) with the possibility that no portion of the estate would pass into the marital trust. Given the increased exemption, this may or may not be what you would want to happen.

The new law provides for “portability” of the estate tax exemption. Under prior law, if the estate of the first spouse to die did not use that spouse’s exemption, it was lost. Now, a surviving spouse may elect to add the deceased spouse’s unused exemption to the surviving spouse’s exemption, thereby increasing the surviving spouse’s estate and gift tax exemption for transfers during life or upon death. For instance, if the first spouse dies and only used $2,000,000 of his $5,000,000 estate tax exemption, the surviving spouse would now be able to elect to shelter $8,000,000 from estate and gift tax (the surviving spouse’s exemption of $5,000,000 plus the deceased spouse’s unused $3,000,000 of exemption).

While the new tax law is a step in the right direction, it only applies through December 31, 2012. Whether your estate is above or below the new exemption amount, it is important to make sure your estate plan is up-to-date to ensure your intent is carried out and to maximize all of the planning options currently available to you. In addition, if a family member passed away in 2010, there could be new planning opportunities available that may benefit the estate.