Estate Tax Planning Gets Simpler (Probably!)
Estate tax planning appears to be getting simpler, at least for the next two years. Notwithstanding the liberal house Democratic caucus' vote to prevent the proposed compromise tax bill from getting on the House floor for a vote, the support for the bill continues to grow, and its passage, in some form close to its original proposal, is likely . The new bill should substantially reduce the number of taxable estates - perhaps by more than half. There were approximately 5,500 taxable estates in 2009. None in 2010.
So, what do you need to know about the estate tax provisions in the tax compromise bill?
Basic Estate Tax: The estate tax rate will be 35% and will apply only to those estates that exceed $5 million per individual. A married couple will each be entitled to an exemption, so a total of $10 million can be transferred at death without incurring any estate tax.
Effective Date: The law will take effect (assuming passage) January 1, 2011.
Duration: The Senate bill makes this legislation effective for 2011 and 2012 only. At that point, absent Congressional action, the estate tax would revert to a maximum 55% rate on all estates over $1 million per individual.
Inflation Indexing: The proposed bill provides that the $5 million exemption will be indexed for inflation beginning in 2012. The drafters of the bill obviously plan an extension of the legislation beyond 2012.
Election for 2010 estates: The legislation provides an option for those people who died in 2010. The option is to use the 2010 rules or the 2011 rules. The 2010 rules allow for no estate tax, but provide for a "carry-over" tax basis for 2010 estate assets, which could ultimately result in substantial capital gains taxes for the heirs who receive those assets. The 2011 rules include the "step-up" in tax basis for estate assets (to the fair market value at date of death), but estates over $5 million will be subject to the estate tax. For the very wealthy, the use of the 2010 rules will be an easy decision. For those with estates between $2 million and $5 million, the decision will be more difficult. The executor of the estate will be required to make that decision.
Portability of Exemption: The "old" estate tax law allows each spouse in a married couple to utilize their own exemption amount. That exemption could be lost however, unless the married couple coordinated their estate plan and utilized an AB trust to ensure that the exemption for the first spouse to die wasn't lost by leaving everything outright to the surviving spouse. The "new" law, if passed, will create "portability" to the surviving spouse for any unused exemption amount for the first spouse to die. This provision could result in the elimination, or at least the reduction, of the use of the AB (sometimes referred to as the "credit shelter") trust. Married couples now must consider whether to place the exemption amount for the first spouse to die into a trust, or allow the outright transfer to the surviving spouse. Family dynamics will now direct the estate plan design for a large number of couples whose planning previously was driven by estate tax planning.
Gift and Generation-Skipping Taxes: The proposed legislation will for the first time unify the estate, gift and generation-skipping taxes. Each individual will now have a $5 million exemption that can be applied against any or all of the estate, gift, and generation-skipping taxes. This move will eliminate the sometimes out of sync planning in the past with different exemption amounts for each of the different taxes. That will allow much simpler business succession planning for family owned businesses, and planning for multiple generations. The $13,000 annual exclusion for lifetime gifts to any individual remains in place.
Significant by its absence is the lack of any provisions dealing with grantor retained annuity trusts (GRATs) and valuation discounts for family limited partnerships and family limited liability companies. These estate planning tools provide meaningful opportunities for planning to reduce, or eliminate, estate taxes for those with estates over $5 million, that otherwise will be subject to the estate tax after passage of the new bill.
Almost all estate plans that are currently in place to deal with taxable estates should be reviewed with your estate planning attorney, when this bill passes. Those who have utilized the AB or credit shelter trust in their planning will want to review whether it remains desirable to retain those provisions in your estate planning documents. Those who have planned for estate taxes above $1 million per individual, will want to review their planning documents to determine whether they want to continue with the current plan that incorporates the estate tax planning that may now be obsolete - this will especially impact those families with total assets between $2 million and $10 million. For blended families, those with children from prior marriages, or second marriages with no children, a review of your estate plan can help ensure the proper protection and distribution of assets after the death of the first spouse to die.
While the estate tax will remain after this legislative change, assuming passage by Congress, the number of estates that will be subject to the estate tax will diminish to probably less than 3,000 estates annually throughout the nation. That means that for the first time (other than the anamalous 2010) in many decades, the vast majority of people can proceed with their estate planning based on what their own desires, goals and concerns, rather than the dictates of the Internal Revenue Code.
So, what do you need to know about the estate tax provisions in the tax compromise bill?
Basic Estate Tax: The estate tax rate will be 35% and will apply only to those estates that exceed $5 million per individual. A married couple will each be entitled to an exemption, so a total of $10 million can be transferred at death without incurring any estate tax.
Effective Date: The law will take effect (assuming passage) January 1, 2011.
Duration: The Senate bill makes this legislation effective for 2011 and 2012 only. At that point, absent Congressional action, the estate tax would revert to a maximum 55% rate on all estates over $1 million per individual.
Inflation Indexing: The proposed bill provides that the $5 million exemption will be indexed for inflation beginning in 2012. The drafters of the bill obviously plan an extension of the legislation beyond 2012.
Election for 2010 estates: The legislation provides an option for those people who died in 2010. The option is to use the 2010 rules or the 2011 rules. The 2010 rules allow for no estate tax, but provide for a "carry-over" tax basis for 2010 estate assets, which could ultimately result in substantial capital gains taxes for the heirs who receive those assets. The 2011 rules include the "step-up" in tax basis for estate assets (to the fair market value at date of death), but estates over $5 million will be subject to the estate tax. For the very wealthy, the use of the 2010 rules will be an easy decision. For those with estates between $2 million and $5 million, the decision will be more difficult. The executor of the estate will be required to make that decision.
Portability of Exemption: The "old" estate tax law allows each spouse in a married couple to utilize their own exemption amount. That exemption could be lost however, unless the married couple coordinated their estate plan and utilized an AB trust to ensure that the exemption for the first spouse to die wasn't lost by leaving everything outright to the surviving spouse. The "new" law, if passed, will create "portability" to the surviving spouse for any unused exemption amount for the first spouse to die. This provision could result in the elimination, or at least the reduction, of the use of the AB (sometimes referred to as the "credit shelter") trust. Married couples now must consider whether to place the exemption amount for the first spouse to die into a trust, or allow the outright transfer to the surviving spouse. Family dynamics will now direct the estate plan design for a large number of couples whose planning previously was driven by estate tax planning.
Gift and Generation-Skipping Taxes: The proposed legislation will for the first time unify the estate, gift and generation-skipping taxes. Each individual will now have a $5 million exemption that can be applied against any or all of the estate, gift, and generation-skipping taxes. This move will eliminate the sometimes out of sync planning in the past with different exemption amounts for each of the different taxes. That will allow much simpler business succession planning for family owned businesses, and planning for multiple generations. The $13,000 annual exclusion for lifetime gifts to any individual remains in place.
Significant by its absence is the lack of any provisions dealing with grantor retained annuity trusts (GRATs) and valuation discounts for family limited partnerships and family limited liability companies. These estate planning tools provide meaningful opportunities for planning to reduce, or eliminate, estate taxes for those with estates over $5 million, that otherwise will be subject to the estate tax after passage of the new bill.
Almost all estate plans that are currently in place to deal with taxable estates should be reviewed with your estate planning attorney, when this bill passes. Those who have utilized the AB or credit shelter trust in their planning will want to review whether it remains desirable to retain those provisions in your estate planning documents. Those who have planned for estate taxes above $1 million per individual, will want to review their planning documents to determine whether they want to continue with the current plan that incorporates the estate tax planning that may now be obsolete - this will especially impact those families with total assets between $2 million and $10 million. For blended families, those with children from prior marriages, or second marriages with no children, a review of your estate plan can help ensure the proper protection and distribution of assets after the death of the first spouse to die.
While the estate tax will remain after this legislative change, assuming passage by Congress, the number of estates that will be subject to the estate tax will diminish to probably less than 3,000 estates annually throughout the nation. That means that for the first time (other than the anamalous 2010) in many decades, the vast majority of people can proceed with their estate planning based on what their own desires, goals and concerns, rather than the dictates of the Internal Revenue Code.
Posted by Randy Coleman at 12/12/2010 5:27 PM 
Categories: Estate Taxes, Family Limited Partnership, Internal Revenue Service (IRS), Business Succession Planning, estate planning, estate taxes, Business Owners, Family Business, estate tax, Gift Tax
Tags: business succession planning capital gains taxes estate planning estate planning attorney estate tax family limited partnership Jacksonville estate planning attorney limited liability company
Categories: Estate Taxes, Family Limited Partnership, Internal Revenue Service (IRS), Business Succession Planning, estate planning, estate taxes, Business Owners, Family Business, estate tax, Gift Tax
Tags: business succession planning capital gains taxes estate planning estate planning attorney estate tax family limited partnership Jacksonville estate planning attorney limited liability company
I'm so thankful that tax planning is getting simpler. I will be planning mine in the next few years, and I'm not looking forward to the headache. I'm almost tempted to hire someone to do the entire thing for me, but that's not usually how I go about things. Thanks for the tips.
-R. Thomas
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