As we are all aware, The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (AKA the 2010 Tax Act) had a profound effect on estate planning. Unfortunately for many hard working Americans, the Federal Estate tax has been a political football for some time, and while a lot of back and forth seems inevitable between now and 2013, President Obama's budget proposal marked the beginning of what we can expect to be a very hot topic in the coming months. This article is the first in what may be a series of updates in the ongoing Federal Estate Tax saga.

So what do we have now, and what are some of the proposed changes to Estate and Gift Taxes?

The 2010 Tax Act increased the estate tax exemption from $3.5 million in 2009 to $5 million from 2010 through 2012. The gift tax exemption was also increased to $5 million.

President Obama's budget proposal would bring back the exemption to the 2009 level ($3.5 million, with a maximum of 45 percent estate tax rate) and also set the gift and generation-skipping transfer tax exemptions at $1 million, with a tax rate of 45 percent. I think it goes without saying that there is a major potential loss in planning opportunities if the gift tax exemption is reduced.

One of the more notable inclusions in the 2010 Tax Act was a portability provision for spouses. Portability takes affect when one member of a married couple passes away and does not surpass their tax exemption. In this scenario, the surviving spouse would have the option to add on the unused portion of their spouse's tax exemption onto their own tax exemption up to $5 million. For example, if the value of the deceased spouse's estate was less than the federal tax exemption by $1 million, then the surviving spouse may add the unused exemption ($1 million) onto their federal tax exemption. Of course we are assuming that lifetime gifts are taken into account when calculating the unused portion.

President Obama's proposal plans to make the portability provision permanent. This is a big win,but remember that currently Connecticut has its own State estate tax exemption ($2 million as of July 2011), and portability of any unused Connecticut exemption is not currently provisioned for in Connecticut Law.

Some other proposed changes of note…

  • Dynasty trusts (implemented to take advantage of the GST) would be limited to a maximum term of 90-years.
  • Basis for Estate and gift tax would be required to be valued and reported consistently.
  • Grantor Retained Annuity Trusts would be affected by imposing a minimum of 10-year terms, with the remainder interest being required to have a value greater than zero.
  • Valuation discounts for business assets would be further restricted.

What to expect in the near future...

Although Congress could affect many of these changes any time over the next couple of years, I am not sure that it is likely anything will be resolved before the 2012 elections. That being said, there are no guarantees that current gifting strategies will be available for the remainder of the period of time between now and then. The biggest concern I have is that substantial tax-saving advantages may be lost due to political "compromise," rather than informed decision-making. It would be prudent for anyone who could be affected by future changes in the Estate Tax laws to take the time to review their existing plan with their financial advisor(s) and their estate planning attorney.


Categories: Estate Planning, Gifting, Taxes