Dear Client, Friend, and Colleague:
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312 (“2010 Tax Act”) has been signed into law. There are a host of significant changes that will affect everyone’s estate plan. The following are urgent points that may affect your planning for the 2010 year, and may require immediate action:
1. 2010 Gift Exclusion:
a. The gift exclusion remains at only $1 million for 2010. If you are married you and your spouse can together gift $2 million.
b. Caution: These figures assume that you have never made taxable gifts before (gifts in excess of $13,000 per donee/year).
c. Caution: The $5 million gift exclusion only begins in 2011. This might be confusing to many taxpayers because the $5 million exclusion for estate and Generation Skipping Transfer (“GST”) is effective 1/1/10.
2. 2010 Annual Gifts:
a. Do you stop making any additional 2010 annual gifts ($13,000, tuition and medical) because the $5 million exclusion in 2011 will mean that the estate tax will never apply to you?
b. Alternatively, should you aggressively plan gifts before year end because in 2013 the estate tax law is supposed to revert to a $1 million estate exemption and 55% rate?
c. Caution: The law, and hence planning, still remains uncertain. This creates both risks and opportunities that you need to weigh.
3. 2010 Gifts to Grandchildren:
a. You may be able to make unlimited gifts to grandchildren, or even to trusts for grandchildren (this had been without doubtful until very recently), and not trigger any GST tax.
b. In 2011 and 2012 transfers to grandchildren (and other “skip persons” in GST parlance) will be limited to the $5 million GST exemption.
c. Unless Congress acts in 2013 the GST exemption drops to $1 million (inflation indexed) and the rate increases to 55%.
d. Caution: This is a free pass for GST not for gift tax and if you gift more than $1 million (or what remains of your gift exclusion) in 2010 you will pay a gift tax.
e. The 35% gift tax rate is the lowest in estate tax history, but is no lower than the maximum gift, estate and GST rate of 35% for 2011 and 2012. While that might be an advantageous tax move, you need to be aware of the cost before proceeding.
f. If you pass on the opportunity to make gifts to grandchildren in 2010, future large gifts could trigger gift (or estate) and GST tax so that the marginal tax cost to make large gifts to grandchildren after 2010 could be substantially greater.
4. 2010 Trust Distributions To Grandchildren:
a. Trustees of certain trusts might have a similar opportunity as described above for you to make gifts to grandchildren.
b. Many trusts were not structured to avoid the GST tax on transfers to grandchildren and other “skip persons.” For example, a bypass trust formed under a late spouse’s will may have listed the surviving spouse and all descendants as beneficiaries, but GST exemption may never have been allocated to exempt the assets in the trust from being subject to GST tax if distributed to grandchildren. Certain types of trusts were never efficient for GST planning. Examples include Grantor Retained Annuity Trusts (“GRATs”), Charitable Lead Annuity Trusts (“CLATs”) and Qualified Personal Residence Trusts (“QPRTs”). Many Irrevocable Life Insurance Trusts (“ILITs”) did not have GST exemption allocated to protect them from GST tax.
c. Trustees of these trusts might be able to make distributions to grandchildren (or other skip persons) free of any GST tax, if these distributions are made before the end of 2010.
d. Caution: The mere fact that there would be a tax advantage to these distributions is not sufficient. The terms of the trust agreement, or will that created the trust, must permit these distributions. If the governing document does not permit these distributions it may be possible that state law, or actions taken based on state law, could facilitate such tax advantaged distributions.
e. Caution: There may also be issues as to which beneficiaries are benefited and which are not. However, given the potential for significant transfer tax savings perhaps these issues can be resolved.
There are significant practical constraints on these planning options. While potentially very advantageous, even lucrative from a planning perspective, there is little time to evaluate, plan and implement these transactions. It is likely already too late to have an institutional trustee review, process and form a new trust even if the estate planning attorney can draft it. The 2010 Tax Act is very new. It is only just being analyzed by professional advisers. The law is potentially subject to modifications by technical correction acts. Provisions of the law may be interpreted by the Treasury Department issuing regulations, and the IRS issuing forms and instructions. If you wish to evaluate and possibly take advantage of any of these opportunities you should contact all relevant advisers immediately. This might include the trust officers and trustees of any trusts, your CPA, wealth manager, insurance consultant and others.
Wishing you and your family a prosperous and healthy New Year.
Jeffrey M. Verdon Law Group, LLP