Congress has just provided us with extraordinary tax and estate planning opportunities. To take advantage of the potential tax savings, you must act before December 31, 2012. The opportunities are provided in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 which was enacted December 17, 2010. Furthermore, with depressed values and low interest rates, now is the time to act.
Federal Gift and Estate Taxes will be unified as of January 1, 2011. This means that one can give free of tax, either during lifetime, or at death, $5 million for a single person, or $10 million for a married couple. The exemption for Generation Skipping Transfer Taxes is $5 million as well, effective in 2010.
Another significant change is that the Federal Gift and Estate Tax exemptions are now “portable” between spouses. Thus, for example, if one spouse passes away without using the entire exemption, it will be available upon the death of the second spouse. Please note, however, the Generation Skipping Tax exemption is not portable.
Among the planning opportunities for individuals with assets in excess of $5 million or $10 million, as the case may be, is the use of leverage in structuring transfers to take advantage of the new exemption amount for Gift, Estate and Generation Skipping Transfer Taxes. Planning might include outright gifts to trusts, or more sophisticated planning like GRATs, Sales to Grantor Trusts, CLATs and Freeze Partnerships.
Although, proposed legislation in the past has threatened to limit the use of entity discounts and short-term GRATs, the new laws do not adversely affect either. These tools, as well as Sales to Grantor Trusts, CLATs and Freeze Partnerships are ideal for transferring assets that are expected to appreciate in value, e.g., interests in family businesses, real estate investments and works of art.
Clients residing in New York should also re-examine the provisions in their existing Wills and Revocable Trusts to take into account the changes in the Federal Tax Laws and their relationship to the New York Tax Laws. New York’s Estate Tax Exemption is only $1 million, but New York has no state gift tax. A $5 million bypass (credit shelter) trust under a Will will attract $391,600 in New York estate tax. Planning to maximize the benefits of the bypass trust can sometimes create large tax savings in the future. However, with the new portability rules and increased exemptions, this might not be necessary or advantageous for smaller estates, especially ones that do not have General Skipping Tax concerns, and increased lifetime transfers should be made.
These are just some of the items to consider with regard to your estate planning. Please contact your attorney at Meltzer, Lippe, Goldstein & Breitstone for more information.