Good News in the Tax Relief Act of 2010

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This Act makes numerous changes that affect estate planning, the most notable of which are:

  1. An Increase in the Applicable Exclusion Amount and the Generation Skipping Transfer (GST) Tax Exemption to $5,000,000. This makes it possible to pass $5,000,000 on to heirs, even if the transfer skips a generation, without paying transfer taxes.
  2. The increase of the Gift Tax Exclusion Amount to $5,000,000. Prior to the Act, the portion of the Applicable Exclusion Amount that applied to lifetime gifts was capped at $1,000,000. Now, the full Exclusion Amount is available for lifetime gifting.
  3. The portability of the Applicable Exclusion Amount. This Tax Relief Act makes it possible for a surviving spouse to inherit the unused portion of the last deceased spouse’s unused Applicable Exclusion Amount, removing the risk that the Exclusion Amount of the first-spouse- to-die could go unused without further planning.
  4. The Tax Relief Act only extends through 2012. This leaves us with continued uncertainty regarding long-range planning and facing the prospect of higher taxes in the future.

These first three changes are good news for people of high net worth because they significantly simplify the techniques that need to be employed and expand their ability to make tax-free transfers of wealth.  While certainly not exhaustive, the following are some of the opportunities before us that many of your clients might want to consider.

  1. Enhanced Planning Flexibility. While there may be reasons to keep Credit Shelter Trusts in their estate plans, particularly if state transfer taxes are an issue and in face of the uncertainty of what will happen in 2013, the portability of the Applicable Exclusion Amount makes the Credit Shelter Trust optional insofar as preserving both spouse’s federal Applicable Exclusion Amount is concerned.  This provides more flexibility in planning, which might allow for revisions that better reflect personal goals, rather than tax minimization.  This is especially true for couples with combined estates of less than $10,000,000.
  2. Enhanced Ability to Make Lifetime Gifts.For clients who continue to have taxable estates, lifetime gifts can make a lot of sense because they remove future appreciation from their taxable estates.  The ability to make lifetime gifts has never been greater and clients may want to explore with their estate planning attorneys the possibility of taking advantage of this expanded opportunity.  In particular, clients who previously used up their $1,000,000 Gift Tax Exclusion will want to consider making further lifetime gifts now that the Gift Tax Exclusion has been raised to $5,000,000.
  3. Enhanced Ability to Make GST Gifts. While the GST Exemption has always been equal to the Applicable Exclusion Amount, it has never previously been as high as $5,000,000. Furthermore, the ability to make large lifetime transfers to skip persons that avoided both gift taxes and GST taxes has never been greater than $1,000,000 (ignoring annual exclusion gifts and payment of tuition and medical care). The fact that a window of opportunity has presented itself to, for example, fund an irrevocable trust for grandchildren with up to $5,000,000 ($10,000,000 for couples) represents an unprecedented opportunity for wealthy clients to consider large lifetime transfers to skip persons.  Such transfers will remove future appreciation from their estates and escape transfer taxation of the intervening generation.

All this is to say that the 2010 Tax Relief Act creates greater flexibility in estate planning and makes it possible to give renewed emphasis on achieving personal goals.  While state transfer taxes remain a factor, and for many will now become the driving force regarding efforts to minimize transfer taxes, the federal estate tax situation has, at least in the short term, become a whole lot simpler.

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