New Federal Estate and Gift Laws Present New Estate Planning Opportunities

As we ring in the New Year, we also ring in new estate and gift tax laws. As many of you have heard, on December 17, 2011, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 ("2010 Tax Relief Act"). The following is a summary of some of the significant estate and gift tax changes for 2011 and 2012:

  • The applicable exclusion amount (i.e. the amount that can be passed to non-spousal and non-charitable beneficiaries) has increased to $5 million. The unlimited marital deduction for transfers to spouses remains in effect.
  • The maximum estate and gift tax rate is 35%.
  • Increase of the gift tax exclusion amount from $1,000,000 to $5,000,000.
  • Increase of the generation skipping transfer tax exemption to $5,000,000.
  • The reinstatement of the step up in basis for property inherited.
  • The availability of "portability" between spouses of their $5,000,000 estate tax applicable exclusion amounts. This allows a surviving spouse the opportunity to take advantage of the unused portion of the applicable exclusion amount of a deceased spouse. For example, if a husband dies in 2011 with a taxable estate of $2,000,000 (and has not made any lifetime taxable gifts), then his unused exemption of $3,000,000 would be available to the wife's estate. Therefore, the wife would not have a taxable estate unless her estate exceeded $8,000,000 in value.
  • Reinstatement of the Illinois estate tax for estates in excess of $2,000,000. As a result, a $5,000,000 estate would not be subject to a federal estate tax but would incur a State of Illinois estate tax of approximately $352,000.

Unfortunately there remains uncertainty with the new laws as they will expire (absent further Congressional action) on December 31, 2012. Thus, the benefits afforded in the 2010 Tax Relief Act have limited duration with a relatively short window of opportunity. Planning opportunities that should be considered include:

  • Lifetime gifts to take advantage of the $5,000,000 gift tax exemption. This is a significant opportunity that has not been available in the past and may not be available long term. Discounts for lack of marketability and for minority interests continue to be available for such gifts.
  • Update of estate plan documents to defer any Illinois estate tax until the second spouse's death.
  • Many of the traditional planning techniques continue to be available, including:
    • $13,000 annual gift tax-free gifts per donee.
    • Grantor Retained Annuity Trusts ("GRATs"). This is a planning technique that transfers future appreciation on assets transferred to a trust.
    • Family Limited Partnerships or Limited Liability Companies, which provides a structure to pool assets for investment purposes that permit gifts at discounted values while retaining family control over investments and distributions.
    • Irrevocable Life Insurance Trusts, which shelter the death benefit of a life insurance policy from federal estate tax.
    • Installment Sales to Grantor Trusts, which provides a structure to sell assets without a taxable capital gain and to disregard as taxable income any interest payments.

If you are interested in learning how these opportunities can be implemented into your estate plan, then please contact either Robert D. Goldstine, Howard Hoff or Eric Wilen.

The article is intended to provide general educational information and is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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