|
ESTATE, GIFT AND
GENERATION-SKIPPING TAX
CLIENT ADVISORY
(Posted February
17, 2010)
Many clients have been asking questions
as to where we feel that the estate tax laws are going and what changes
they might/should be considering for their estate plans at this time.
The year end tax letter that we forwarded in November 2009 dealt with
several estate tax planning techniques, most of which are still viable,
but did not directly address what might happen if Congress did not
effect any gift, estate tax or generation skipping transfer tax changes
by the end of the year. The following are a few comments about the
status as we know it.
Gifts and Estate Taxes As We Know Them in
Early 2010. Since
Congress did not act to change the Gift and Estate Tax Laws prior to the
end of 2009, what are we left with for gift tax and estate tax
provisions in 2010? We still have an annual gift tax exclusion of
$13,000 per donor per donee, and the lifetime additional gift tax
exemption of $1,000,000. For all taxable gifts in excess of the normal
exclusions and the lifetime exemption the gift tax rate is 35% (instead
of 45% in 2009). Remember that gifts do not include transfers to pay
for any donee’s qualified educational expenses and medical expenses,
provided those payments are made directly to the educational institution
or the health care provider, nor transfers between spouses.
Estate Taxes.
As of January 1, 2010, we have no estate tax nor generation skipping
transfer tax. This will change whenever Congress amends the estate tax
laws this year. If no amendment is enacted, then the current provisions
for 2011 include a $1 million estate tax exemption and a top estate tax
rate of 55%. The generation skipping transfer tax exemption would be $1
million plus adjustments for increases in the cost of living after
1999.
Carry Over Basis.
Normally when one dies there is a complete step up in the basis of the
assets included in a decedent’s estate to the fair market value as of
the date of death; however, as of January 1, 2010, we now have a
“modified” carry over basis rule which provides that the basis of the
assets in the decedent’s estate will be the lesser of the decedent’s
adjusted basis or the fair market value of the property as of the
decedent’s demise. There are two exceptions; each decedent is eligible
for a $1.3 million step up in basis for assets in the estate regardless
of to whom they pass; and there is an additional $3 million basis
increase for assets which qualify for the martial deduction for assets
passing to a surviving spouse. Unfortunately, most estate documents do
not include guidance as to how the basis is to be allocated.
Formula Clauses.
Many taxpayers allocate
assets by formula amongst shares which qualify for the estate tax
exemption or “credit” amount or “credit shelter amount” and/or the
“marital deduction amount,” or refer to such terms as the “exemption
equivalent,” “estate tax exclusion,” or the “generation skipping
transfer tax exemption.” The unintended consequence of the elimination
of the estate tax and the simultaneous elimination of the exemptions and
credits can radically affect how the assets will pass at death because
many of these terms have no meaning if there is no estate tax or
generation skipping transfer tax (“GSTT”). For example, if a Will (or
Living Trust) directs “the maximum amount exempt from the GSTT and/or
estate tax will be allocated to trusts for grandchildren,” with the rest
allocated to “a trust for the surviving spouse,” then ALL of the estate
could pass to the grandchildren and NOTHING will pass to the surviving
spouse nor to the children if there is no estate tax nor generation
skipping tax. Clients should therefore very carefully analyze their own
Wills and/or Revocable Trusts with their professional advisors to
determine whether their estate plans will be adversely affected by the
current state of the estate tax and GSTT laws.
Congressional action.
A majority in Congress is opposed to any regime which exempts all
estates from estate taxes. Even though the estate tax generates only
about 1% of the federal tax collections, any adjustment in the tax
collections may adversely affect any proposals for healthcare or other
legislation. The biggest area of controversy is whether or not any
change in the estate tax law that is enacted during 2010 will be
effective retroactive to January 1, 2010. Some commentators suggest
that any such change will be subject to constitutional challenges for
years to come. This is one incentive for Congress to act quickly on the
estate tax exempt amount issue and/or the GSTT exemption or other
potential changes such as limitations on short-term GRATs, QPRTs,
discounts for valuation purposes on Family Limited Partnerships, LLCs
and partial interests in real property and similar techniques. We
believe there is substantial authority to support the retroactive
application of the estate tax changes (at least) to January 1, 2010.
What to do now?
We do not have a crystal ball. Any legislation that passes this year
will probably have “remedial” or tax adjustment provisions, but that is
not a certainty. Since we, like most other law firms, do not have a
continued client relationship which includes a duty to provide tax and
estate planning updates, if you have any questions as to how your Will
and/or Trust is affected by this situation, call us to review your
estate plan. Remember you still may take advantage of the gifting
exemptions and exclusions, the payment of qualified education and health
costs of others, gifts to Section 529 plans, Grantor Retained Annuity
Trusts (GRATs), Qualified Personal Residence Trusts (QPRTs) and other
well known techniques, but as of President Obama’s presentation of the
new budget proposals on February 2nd the window may be
closing soon on short term GRATs and certain valuation discounts. Also
let us know if we can help you analyze whether or not to convert part or
all of a traditional IRA to a Roth IRA now that the limitations on those
conversions have been removed.
|
More
Information:
Business/Corporate Services
Private
Client Services
Taxation
Trusts & Estates
Our Private
Client Service Attorneys:
Carlos J. Berrocal
David E. Bowers
Tasha
K. Dickinson
Stephanie C. Eassa
Thornton M.
"Tim" Henry
Harry
A. Johnston
Brian
D. Kennedy
Theo S. Kypreos
John
B. McCracken
Peter A. Sachs |
