Four good reasons to engage an estate planner, and now! | submitted by Gregory Monday

Uncle Sam’s latest tax act may have jumbled your estate plan, but it also may have created opportunities to save your family millions in estate taxes – opportunities that might slip away if you don’t act now.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA), enacted December 17, 2010, affects gift taxes, estate taxes, and generation-skipping transfer taxes (GST taxes) in ways that are mostly favorable to the taxpayers – at least, compared to what the law would have been in the absence of the TRA. Unfortunately, the most advantageous provisions of the TRA are set to expire December 31, 2012. At that time, the law will revert to provisions that are much less favorable to taxpayers, unless Congress acts to extend or replace the TRA. The White House has proposed replacing the TRA with provisions that are mostly less favorable to taxpayers.

The key transfer tax provisions of the TRA (with some simplification) are as follows:

  • Taxable gifts (i.e., lifetime gifts in excess of $13,000 per year, per recipient) are subject to gift taxes at a rate of 35%, but the first $5 million of such gifts is excluded. Without the TRA, the top gift tax rate would be 55% and the gift tax exclusion would be $1 million.
  • Decedents’ estates are subject to estate taxes at a rate of 35%, but the first $5 million of estate value (after adding back in taxable gifts) is excluded. Without the TRA, the top estate tax rate would be 55% and the estate tax exclusion would be $1 million.
  • GSTs (i.e., transfers to descendants that will avoid estate taxes in one or more future generations) will be subject to GST taxes (a tax that is separate from gift taxes and estate taxes) at a rate of 35%, but the first $5 million of GSTs will be exempt. Without the TRA, the GST tax rate would be 55% and the GST exemption would be about $1 million.
  • Assets passing at death will receive a new cost basis, equal to date of death value. This is an improvement over the state of the law in 2010.

These changes may cause unintended consequences for your current estate plan, but if you act in a timely manner, you and your estate planning advisors can use these provisions to improve both the tax and non-tax elements of your estate plan. The following are four prime examples:

1. Review Estate Tax Formulas

Many wills, trusts, marital property agreements, buy-sell agreements, and other estate planning or business succession documents have key provisions that are written as formulas based on the federal estate tax exclusion or GST exemption. Given the dramatic increase of these amounts under the TRA, all such formula provisions should be reviewed and possibly adjusted to ensure that they optimize estate tax planning provisions under the TRA and do not have unintended consequences, such as disinheriting a spouse or child. This is especially critical if you have children who are not also the children of your spouse or if charitable giving is a large part of your estate plan.

Do not believe reports that the so-called “portability” provision obviates the need for tax planning formulas in your estate plan. That provision, which allows some people to use their deceased spouse’s unused estate tax exclusion during lifetime or at death, currently would apply only under a unique set of circumstances.

2. Revisit Past Gifting Arrangements

If you have established complex gifting arrangements – for instance, low-interest loans to children, life insurance held in an irrevocable trust, a home held in a qualified personal residence trust, or other assets held in a grantor retained annuity trust – under the previously available gift tax exclusion of $1 million, you may be able to complete, simplify, or improve those arrangements using the $5 million gift tax exclusion under the TRA.

3. Consider Additional Lifetime Gifts

The increase of the gift tax exclusion to $5 million under the TRA (or $10 million for a married couple) creates the opportunity to transfer an extraordinary amount of wealth to your children or grandchildren by gift, free of gift taxes and estate taxes. However, because of the scheduled sunset of the TRA, you may have to complete such gifts before the end of 2012 to take advantage of this opportunity. Further, the White House has indicated that it would favor eliminating certain gifting strategies when the TRA sunsets, such as the use of valuation discounts.

4. Consider Enhancing the Use of Generation-Skipping in Your Estate Plan

Under the TRA’s increased GST tax exemption, a married couple could transfer at least $10 million to a trust for their children and future generations in a way that would shelter trust property from estate taxes (theoretically) in perpetuity. Such trusts, referred to as “dynasty trusts,” also can protect your descendants’ inheritance against claims of creditors, lawsuits, and divorcing spouses. The GST exemption applies to lifetime gifts as well as transfers on death, so you may be able to lock in use of some or all of the increased GST exemption through transactions that are completed before the end of 2012.

In addition to those discussed above, there may be other reasons special to your particular situation that make it important for you to review your estate plan under the TRA: same-sex relationships, serious illness, plans to treat your children differently under your estate plan, or a spouse passing away before 2013.

The transfer tax law changes under the TRA are substantial and were mostly unanticipated. Your estate planning advisors can help you ensure that your estate plan is enhanced, not impaired, by the TRA and the tax laws that may replace it.

Gregory Monday is an attorney with Foley & Lardner, LLP (

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