2011-2012 Must Dos: Review Your Estate Plan
by Morris Sabbagh, Esq.
While it is true that the Tax Relief Act of 2010 has finally brought some certainty to estate planning, this is only temporarily true. That is because, unless Congress takes further action, the new gift, estate and generation skipping tax rules will only be in place until December 31, 2012. For many, 2011 and 2012 will provide a two year window of estate planning opportunity never seen before– and perhaps never to be seen again. At the same time, the changes have brought about potential traps for the unwary, likely to ensnare many families who fail to review their plans right away. This article will summarize the changes and review both the opportunities and the pitfalls that must be considered.
Summary of Changes
- For estates of individuals dying in 2011 and 2012 there is a federal estate tax which kicks in above $5 Million* and a maximum estate tax rate of 35%. (*The estate, gift and generation skipping transfer tax exemptions are indexed for inflation in 2012.)
- The exemption for lifetime gifts in 2011 and 2012 is also $5 Million with a maximum gift tax rate of 35%.
- The exemption for generation skipping transfers (additional tax on transfers that skip a generation) in 2011 and 2012 is $5 Million with a maximum generation skipping transfer (GST) tax rate of 35%.
- For deaths in 2011 and 2012 widows and widowers can add their spouse's unused exemption to their own exemption in order to increase their available gift and estate tax exemption (but not GST tax exemption) to as much as $10 Million (a strategy known as "portability").
- The "unlimited step up in basis" is back for all years including 2010, which means that for income tax purposes, the cost basis of all inherited assets will be adjusted to the fair market value of those assets on the owner's death, saving the beneficiaries capital gains taxes when inherited assets are sold.
- Due to sunset provisions, the new law will expire at the end of 2012. So, absent further legislation, the gift, estate and GST tax exemptions will return to $1 Million in 2013, with maximum gift, estate and GST tax rates of 55%.
Estate Planning Opportunities
Due to the increased gift and GST tax exemptions, 2011 and 2012 will be boon years for the wealthy to make tax free transfers. People with large appreciating estates should continue to use gifting strategies including family limited partnerships, Grantor Retained Annuity Trusts (GRATs), Sales to Grantor Trusts, Life Insurance Trusts, charitable gifts and other strategies to minimize estate taxes. Most estate planning attorneys expect Congress to extend the $5 Million exemption beyond 2012. However, past experience has proven that predicting what Congress will do next is a losing gamble. If the exemptions drop from their current levels, there could be an estate tax imposed at death on current transfers (referred to in the estate planning community as a "clawback").
However, for very wealthy individuals, this should not discourage continued gifting. Current gifts will capture discounts and prevent a tax on the increased value of assets at death.
All Wills & Trust Documents Require Review
It is now more important than ever to review your Will and Living Trusts, especially for those who are middle class or moderately wealth. The reason is that for years attorneys have been drafting these documents with clauses that, rather than stating a specific sum of money that will go in trust following a spouse's death, are tied to what the estate tax exemption will be at the time of death (commonly known as Credit Shelter or Bypass Trusts). When the estate tax exemptions were lower, this made sense because it saved taxes and the exemptions were relatively stable. However, with exemptions currently as high as $5 Million, your Will or Living Trust may no longer say what you originally intended. Review your documents to see whether it describes a bequest as "a portion of my estate," "a fraction or percentage equal to," or with similar phrases. If it does, revisions may need to be made to ensure that your intentions are properly satisfied. Failure to do so could mean that a spouse or child may be unintentionally left out, or that your heirs will be in court fighting over what your true intentions were.
Legislative changes can be confusing and sometimes overwhelming. If you have any questions about how the new laws may affect you, or would like to discuss your particular situation, please call our office.
Morris Sabbagh, Esq. concentrates in the areas of Estate Planning and Elder Law. He can be reached at 516-437- 4385, ext. 120 or via email at Msabbagh@vmmlegal.com.