Tax, Trusts & Estates Law Monitor : Estate Planning Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Gift Tax & Trust Issues

On October 20, 2011, the IRS released Revenue Procedure 2011-52, which announced inflation adjustments to the applicable exclusion amount beginning in 2012. For an estate of any decedent dying during calendar year 2012, the applicable exclusion is increased from $5 million to $5.12 million.  This change increases not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount.

The $13,000 gift annual exclusion has not been increased.

Note that the present tax law provides that if there is no change in the law prior to December 31, 2012, the applicable exclusion will be reduced to $1 million, subject to inflationary adjustment.  Due to this potential decrease in the lifetime gift exclusion, now is the time to seriously consider gifting options before they are limited.

Other items of note that also are subject to inflationary adjustment in 2012 include the social security wage base, which increases from $106,800 in 2011 to $110,100 in 2012, and the maximum amount that can be deferred into a 401(k) from $16,500 to $17,00

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On March 30, 2011, a few members of the House Ways and Means Committee (Kevin Brady, R-Texas, joined by Mike Ross, D-Arkansas, Kristi Noem, D-South Dakota, Dan Boren, D-Oklahoma and Devin Nunes, R-California) introduced legislation, HR1259, to repeal the estate and generation-skipping transfer tax, effective on date of enactment.  The legislation does not repeal the gift tax; it is maintained with a $5 million exemption and a 35% gift tax rate.  In lieu of estate and GST taxes, the legislation provides that there would be no step up in basis for assets at death and in its place, the carryover basis regime that was part of the 2010 estate tax repeal would be utilized.  It is not imminent that this legislation will be enacted, nor do we expect it to go far, but we nevertheless will keep an eye on it.

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For those people who thought there would be a lull in proposed estate/gift tax legislation as a result of the sweeping 2010 tax law, that is not the case. President Obama’s 2012 budget proposal released last week contains numerous important estate and gift tax proposals, which are as follows:

1. Returning the estate/gift tax to 2009 levels, meaning a $3.5 million estate tax exemption amount, a 45% estate/gift tax rate and a $1 million lifetime gift tax exemption.
2. Making permanent the new portability rules with respect to enabling the surviving spouse to use the deceased spouse’s unused exclusion amount.
3. Adding another category of restrictions for family controlled entities that would be required to be disregarded for valuation purposes. A key component of planning involves the use of leverage and valuation discounts to reduce (i) the value of lifetime gifts if assets are transferred during life and (ii) the value of a decedent’s assets at death. This proposal potentially could limit the utility of family owned investment partnerships and limited liability companies.
4. Limiting the use of GRATs to a minimum term of 10 years and requiring the remainder interest to have a value greater than zero. This proposal has been floating around for some time now, and is another attempt to have the usefulness of GRATs minimized.
5. Limiting the duration of generation-skipping transfers in trust to ninety (90) years from the creation of the trust. With many states eliminating rules related to the duration of trusts, this proposal is aimed at recapturing revenue lost with the permitted perpetuity of trusts.

As these proposals are debated, we will keep you apprised of any developments.
 

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The following letter was recently distributed to clients and friends of Cole Schotz:

Dear Clients and Friends:

On December 17, 2010, President Obama signed into law sweeping new tax legislation that makes significant changes to estate, gift and generation-skipping transfer (“GST”) taxes. Not only may the new law have a dramatic impact on your existing estate plan, which we now strongly encourage you to review, it may also provide an excellent opportunity to implement additional planning that could benefit several generations of descendants.

In this regard, it is important to note that the new law is temporary – the favorable tax provisions sunset at the end of 2012, at which time Congress will either pass new legislation or allow the provisions of the 2001 tax law to take effect ($1 million exemption and a top estate and gift tax rate of 55%). Thus, it is critical for you to review your estate plan during this two year period to ensure you are maximizing your tax saving opportunities.

This letter contains a brief overview of the major changes to the federal estate, gift and GST tax system, all of which are effective January 1, 2011:

• The estate, gift and GST exemptions are $5 million per taxpayer and the tax rate is 35%. Prior to the suspension of estate and GST taxes in 2010, the estate and GST exemptions were capped at $3.5 million, the gift tax exemption was capped at $1 million and the top tax rate was 45%. The exemption amounts will be adjusted for inflation after 2011.
• The estate tax exemption for a deceased spouse is now “portable,” meaning the surviving spouse can use the unused estate tax exemption of the “last deceased spouse.” Thus, for example, if the first deceased spouse’s exemption is left fully intact, the surviving spouse will be able to transfer during his or her lifetime or at death $10 million gift and estate tax free. Use of the last deceased spouse’s exemption is not automatic – an election will need to be made on the last deceased spouse’s federal estate tax return. In addition, the deceased spouse’s GST exemption is not portable. What this all means is that portability planning is not simple, and proper thought and consideration needs to be given to this issue to ensure it is being handled correctly.
• The lifetime gift tax exemption increases from $1 million to $5 million (and $10 million per couple) so that the gift tax exemption is now unified with the estate tax exemption. This presents many planning opportunities for taxpayers to transfer significantly more wealth during their lifetimes without paying gift tax. For those taxpayers who have previously utilized their full $1 million lifetime gift exemptions, the new tax law permits an additional $4 million of lifetime gifting gift tax-free. The annual gift exclusion remains at $13,000 in 2011, or $26,000 per couple.
• There was concern that the new legislation would include restrictions on the use of (i) valuation discounts when transferring ownership interests in family entities as a part of a gift giving program and (ii) short term grantor retained annuity trusts (“GRATs”), a very effective technique to transfer assets without the imposition of gift tax. The new tax law does not contain either restriction. Thus, family entity planning, short term GRATs and sale transactions to trusts should be seriously considered, especially in light of the increased exemption amounts, and the current low valuation and interest rate environment.
• If, unfortunately, someone died in 2010, the new legislation has provided two different approaches to utilize in administering 2010 estates. The default rule is that the estate tax regime applies at a 35% rate and a $5 million estate tax exemption. The executor can opt out of the estate tax regime and instead choose the carryover basis regime, meaning there will be no federal estate tax but the decedent’s beneficiaries will not get a stepped-up basis in the assets inherited (subject to a limited right to increase the basis by $1.3 million for any beneficiaries and an additional $3.0 million for spouses).
• While significant changes were made to the federal transfer tax system, as discussed above, state estate taxes remain unchanged. Due to the greater disparity between the federal exemption amount ($5 million) and state exemption amounts (New Jersey –$675,000 and New York -$1 million), a larger (and potentially) unnecessary state estate would be triggered if your existing estate plan maximizes the federal estate tax exemption. While the federal exemption is now portable, state exemptions are not, so it will be even more important for estate plans to provide flexibility to enable the appropriate decisions to be made to maximize tax savings. Finally, for those taxpayers who travel to Florida and can make it their home, the new law magnifies even further the importance of reviewing the possibility of changing one’s domicile from New Jersey or New York to Florida to avoid the imposition of state estate taxes.
• As mentioned above, the new tax is not permanent – it sunsets at the end of 2012. Due to the temporary nature of the new law, it may be prudent for taxpayers to take advantage of the additional $4 million of tax-free gifting that is available for the next two years. Not only will additional gifting take advantage of the larger lifetime gift exclusion amount, it will remove the future appreciation of the gifted asset out of the taxpayer’s estate and potentially shift income to beneficiaries in lower income tax brackets.

We strongly recommend that you contact a member of our Tax, Trusts and Estate Department to review the effect of this change in law on your estate plan, whether or not we drafted your estate planning documents. Together, we can determine what steps, if any, need to be taken to achieve your estate planning objectives and to maximize the amount of wealth that will pass to younger generations. A list of the members of this department is attached to this letter.

Best wishes for a happy and healthy New Year.

Very truly yours,

COLE, SCHOTZ, MEISEL, FORMAN & LEONARD, P.A.
TAX, TRUSTS & ESTATES DEPARTMENT
 

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The following letter was recently distributed to clients and friends of Cole Schotz:

Dear Clients and Friends:

Due to Congressional inaction in the final weeks of 2009, the Federal estate tax has been repealed for individuals dying in 2010 and the generation-skipping transfer (“GST”) tax has been repealed for generation-skipping transfers made in 2010. However, current law provides that the estate tax and GST tax will be restored as of January 1, 2011 with only a $1 million applicable exclusion and a $1 million GST exemption, indexed since 1998 for inflation, as compared to the $3.5 million applicable exclusion and GST tax exemption that had been in effect in 2009. The Federal gift tax remains in place (though at a lower tax rate) with a $1 million exemption and will not change except as to certain specialized trusts.

It was widely anticipated in the tax and estate planning community at large that Congress would take action before the end of 2009 to prevent this result. Therefore, virtually all tax professionals determined that it was unnecessary for clients to undertake a review of their estate planning documents prior to the end of 2009. Since Congress did not act, however, it is important for you to be aware of this situation which will likely be resolved in one of the following ways:

1. Congress could pass legislation which reinstates the estate tax and GST tax with specified exemption amounts that would be retroactive to January 1, 2010;
2. Congress could pass such legislation that would be effective as of a later date; or
3. Legislation will not be passed in 2010, in which case, there would be no estate or GST tax in effect until January 1, 2011, when those taxes would be reinstated with a top estate and GST tax rate of 55%, an applicable exclusion amount of $1 million and a GST exemption of $1 million, indexed since 1998 for inflation.

Of course, other scenarios are always possible as Congress’ action or inaction is impossible to predict. We will closely follow all discussions in Congress, review all proposed bills, and advise you when legislation has been enacted. We also will post updates to our tax blog (www.taxtrustsandestateslawmonitor.com) on these matters as they break.

While the prevailing view is that Congress will address these issues and retroactively restore the estate and GST taxes effective as of January 1, 2010, there is no guarantee that this will occur. Therefore, it is important that you are aware that the current state of the law, with repeal in place, could create unintended results as to how your assets will pass at the time of your death and could result in adverse tax consequences. Whether your particular situation is impacted and, if so, in what manner, depends on the particular wording in your Wills, Trusts and other estate planning documents and on your family and financial circumstances.

Examples of only a few of the situations that could produce unintended results include (i) an allocation of assets between the children of a current or prior marriage and a surviving spouse and (ii) an allocation of assets between children and grandchildren, where such allocations are based on tax concepts that were in effect when your Wills were executed but are no longer in effect under current law. In both of these cases, assets may be distributed in a way that you did not intend. The potential tax consequences that could result if the repeal stays in effect are literally too numerous to mention here, and must be explored on an individual basis.

Another change that applies only in 2010 relates to the tax basis of inherited assets. Under the law in effect prior to 2010 and again in 2011, the tax basis of inherited assets generally changes to the value of those assets on the date of the decedent’s death. Under the law now in effect, however, the basis in inherited assets remains the same with two limited exceptions: (i) up to a $1.3 million increase in basis will apply to assets passing to beneficiaries on a decedent’s death and (ii) up to an additional $3 million increase in basis will apply to assets passing to a surviving spouse.

Given that the potential tax and distribution impact could be significant, we suggest that you contact a member of our Tax, Trusts and Estate Department to review the effect of this change in law on your estate plan, whether or not we drafted your estate planning documents.

Best wishes for a happy and healthy new year.

Very truly yours,

Cole, Schotz, Meisel, Forman & Leonard, P.A.

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