Nothing like the last minute.
Congress finally acted to provide some certainty for taxpayers and their advisors on the gift tax, estate tax and generation skipping transfer tax. The new law, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, sets up the following scheme for tax years 2010 - 2012:
2010 Estate Tax
Exclusion amount: $5,000,000
Maximum tax rate: 35%
Option to elect carryover basis instead of Estate Tax
2010 Gift Tax
Exclusion amount: $1,000,000
Maximum tax rate: 35%
2011 Estate Tax / 2012 Estate Tax
Exclusion amount: $5,000,000 (indexed by CPI 2012+)
Maximum tax rate: 35%
2011 Gift Tax / 2012 Gift Tax
Exclusion amount: $5,000,000
Maximum tax rate: 35%
2013 Estate Tax
??????
Unless Congress acts in 2012, this new law will sunset and 2013 will revert to the old rates ($1M exclusion and 55% top rate)
So, now we know what the big debate during the 2012 Presidential Election season will be -- taxes.
The other important change is the portability of the exclusion amounts between spouses. Under prior law, smart tax planning often required the creation of a Credit Shelter or Bypass Trust to receive the exclusion amount of the first spouse to die. The new law doesn't require such techniques. Even a couple with a so called "sweetheart will" that leaves their entire estate to each other with no other tax provisions will still benefit from a combined estate tax exclusion of $10,000,000.
Unfortunately, while this provision seems to simplify things for clients and their advisors, "exclusion portability" could actually be a trap for the unwary for numerous reasons, including:
1) The deceased spouse's exclusion is not indexed to inflation so the deceased spouse's assets are likely to continue to grow and thereby suffer unnecessary tax at the second spouse's death. Placing those assets in a Credit Shelter Trust would have avoided this major issue.
2) Asset held directly in the surviving spouse's name are subject to subsequent lawsuits, marriages/divorces, mismanagement, creditor attacks, etc. Assets in a Credit Shelter are insulated from all of this.
3) Credit Shelter Trusts ensure the funds eventually wind up benefiting the children, grandchildren, friends or charities the deceased spouse wanted to help. Funds left directly to the surviving spouse are subject to his/her whims and planning (or lack thereof). Those funds could wind up going to the survivor's new spouse or children in the event of remarriage.
4) The current law will automatically disappear in two years without Congressional action. Relying on any unusual provision of this new law (like portable exclusions - something unheard of until now) might be asking for trouble given the uncertain future and unstable political and financial situation of the country.
The new law certainly creates a tremendous opportunity for smart planning. Unfortunately, there is a real danger that it will lead to complacency amongst clients and advisors who focus solely on the larger exclusion amounts and assume estate planning is unnecessary. This could be disastrous.
All clients should seek out qualified legal counsel to plan their estate, regardless of age or wealth. Estate taxes are but one reason for smart estate planning. Don’t forget about:
* guardianship for minor children
* asset protection planning
* family business succession
* liability protection
* legacy management
* special needs planning
* planning for second marriages or troubled family situations, etc.
In addition, the New York State Estate Tax has NOT changed, and it applies to estates of $1,000,000+.
As always, you are invited to contact me directly with any questions or concerns. I am always happy to help.
All the best,
Joe Donlon
The estate planning law firm of Donlon & Associates, PC provides high quality, focused legal counsel to clients all ages and wealth levels in the following areas:
Wills & Trusts
Asset Protection Planning
Estate Tax Planning
Elder Law
Special Needs Trusts
Probate & Estate Administration
Donlon & Associates, PC serves clients throughout New York City and Long Island, including Nassau County, Suffolk County, Queens, Brooklyn, Manhattan, and Staten Island.
