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News 7.1.11

Estate Tax Reform (Sort of) Passes

by William HT Frey and Jenna H. Keller
Congress has passed and President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 as we went to press for this newsletter.   The following is a short summary of the effects of the Act on estate and gift taxes:  
  • The estate tax exclusion amount is raised to $5 million per person;
  • Any unused exclusion amount can be passed to a surviving spouse without using a bypass or family trust;
  • The estate tax rate will be 35 percent on assets above the exclusion amount; and
  • The gift tax lifetime exemption is raised to $5 million.
  The changes made are temporary and will expire on December 31, 2012, (reverting back to the $1 million exemption and 55 percent tax rates that would have taken effect January 1, 2011, if this Act was not passed). Although there were numerous proposals for change of what the IRS considered abusive planning techniques, the Act does not change the rules for discounting the value of family entity interests, use of zeroed-out grantor retained annuity trusts, or intra-family loans and sales.   For most of our clients, the Act means that their estates will be estate tax free (if you die in 2011 or 2012) and that planning will revolve around making sure that your assets pass to your intended beneficiaries as you desire with a minimum amount of cost and difficulty.   Most of the tax-planning wills we have written in the recent past provide for disclaimer funding of a bypass trust by the surviving spouse; no change will usually be needed for those wills and keeping the disclaimer funding of a bypass trust in the will is a good idea because the Act is temporary and there are still good reasons to use a bypass trust (including sheltering any growth of the assets in the bypass trust from estate tax and creditor protection of the trust assets) and not rely upon the portability provisions of the Act.   For clients who have wills with formula clauses that require funding of a bypass trust, you will want to consider whether that provision still reflects your intent or creates unnecessary uncertainty about the distribution of your estate with the new higher exemption amount.   For a surviving spouse to "inherit" the unused exclusion amount of their spouse, the deceased spouse's estate must timely file an estate tax return to allow transfer of that spouse's unused exclusion amount to the surviving spouse. Therefore, even when a spouse's estate is too small to require the filing of an estate tax return, the estate will need to file an estate tax return for the deceased spouse if the surviving spouse wants to be able to claim the additional unused exclusion amount. Therefore, it likely that almost all estates of married persons will need to file an estate tax return in order to preserve the unused exclusion amount.   For some clients, the increase of the lifetime gifting exemption amount will open a window to pass a family ranch or business to the next generation without concern about the gift tax, possible future value increases, or changes to the estate tax law after 2012. For clients with large family businesses or ranches, the next two years could be the best opportunity to pass those assets to the next generation without having to pay significant transfer taxes.

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