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Our office is currently closed, but we continue to provide legal services by working remotely.

In light of Governor Wolf’s emergency declaration and current recommendations our office is currently closed.  Our attorneys and staff continue to work remotely, however, and we can assure you they are set up to respond to your calls, emails and all communications.  For more details on AMM operations during this time, read our full update.  

Thank you for your understanding, and please take care.

Client Alert: Revisions to the Federal Estate, Gift & GST Taxes

January 2011

On December 17, 2010, President Obama signed into law the “Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010” (referred to here as the “Tax Relief Act”).  The Act contains a number of changes to federal income taxes, as well as federal estate, gift, and generation-skipping transfer (“GST”) taxes.  This alert focuses on the changes to the estate, gift and GST taxes.

Prior to the Act, the federal estate and generation-skipping transfer (“GST”) taxes had
been repealed during 2010 by reason of the provisions of the “Economic Growth and Tax Relief Reconciliation Act of 2001” (known as “EGTRRA”), though the gift tax remained.  With that repeal came changes to the federal income tax rules, such that there was to be limited “step-up” in income tax basis upon the death of a taxpayer.  But EGTRRA’s repeal of the federal estate, gift and GST taxes, and corresponding income tax changes, were scheduled to expire on December 31, 2010.  Upon expiration, the federal estate and GST taxes were to return via the revival of pre-EGTRRA law, with a modest exemption from the federal estate and GST tax of $1,000,000 per individual (with the GST tax exemption being adjusted for inflation with 2001 as the base year), and with a top estate, gift and GST tax rate of 55%.

 All of that changed with the enactment of the Tax Relief Act.  The federal estate and GST taxes have been reinstated effective January 1, 2011 (and executors or administrators of estates of decedents dying in 2010 can choose either EGTRRA or the Tax Relief Act) , and the gift tax remains.  However, the estate, gift and GST tax regime under the Tax Relief Act is quite different than it was prior to 2010.  The key components of the new structure are as follows:

• The estate, gift and GST tax rates are reduced to 35%, as compared to a top rate of up to 45% under EGTRRA and 55% under pre-EGTRRA law.

• There is an estate and GST tax exemption amount of $5,000,000 per individual (and up to $10,000,000 for married persons), as compared to $3,5000,000 in 2009 under EGTRRA, and $1,000,000 under pre-EGTRRA law.

• The gift tax exemption is once again “unified” with the estate and GST tax exemption, such that the gift tax exemption is also $5,000,000.  This is in contrast to the $1,000,000 exemption that had been in place under EGTRRA, and now allows for greater gifting of assets during lifetime without incurring gift tax.

• The $5,000,000 estate tax exemption amount is “portable” between spouses, which is in stark contrast to prior law.  Under prior law, the exemption was not portable.  As a result, under prior law, a decedent would need to leave assets in trust for the surviving spouse (a so-called “bypass” or “credit shelter” trust) if he or she wanted to benefit the surviving spouse and get the use of the decedent’s estate tax exemption.  With portability, such trusts are not as necessary to preserve and use a predeceasing spouse’s estate tax exemption, but remain advisable for federal estate tax planning purposes.

• The $5,000,000 GST tax exemption is not portable, so that transfers to trusts or direct transfers to grandchildren will still be necessary to utilize a predeceasing spouse’s GST tax exemption.

• But, all of the foregoing provisions expire on December 31, 2012, and the provisions of EGTRRA return on January 1, 2013.  This would bring a $1,000,000 estate, gift and GST tax exemption, though the GST tax exemption would be adjusted for inflation using 2001 as a base year (to approximately $1,400,000).  It would also bring the return of a top tax estate, gift and GST tax rate of 55%.

Reviewing of Estate Plans –  As a general matter, we believe everyone should consider revisiting their estate plans (i.e., Wills and/or Revocable Trusts) in the face of any new legislation, to be sure that the plan works as originally contemplated.  It is particularly advisable for those whose Wills or Revocable Trusts contain a “formula” division of the estate based on the federal estate tax exemption.  Such formulas are most commonly used with married couples.  Such formulas typically provide that the assets in the predeceasing spouse’s estate, up to the amount of the predeceasing spouse’s estate tax exemption, be directed to a trust for the surviving spouse.  While in most situations it will likely be wise to continue the use of such formula provisions, in certain circumstances it may be preferable for individuals to move to a different format.

Gifting During 2011 and 2012 – The Tax Relief Act opens the door to significant opportunities for making lifetime gifts, at least until December 31, 2012.  With the gift tax exemption being “unified” with the estate and GST tax exemption during 2011 and 2012, individuals may give up to $5,000,000 during lifetime without incurring a gift tax (and thus up to $10,000,000 per married couple).  For those who have a higher net worth, and can afford to relinquish ownership of assets, it is advisable to look at strategies for giving.  In thinking about gifting, it is important to note that the Tax Relief Act does not change the rules relating to valuation discounts, or the use of Grantor Retained Annuity Trusts, which many feared would occur.  Using these strategies in conjunction with the increased gift tax exemption could be extremely valuable.  Since the $5,000,000 gift tax exemption is scheduled to sunset on December 31, 2012, we highly recommend that more affluent individuals strongly consider such strategies during this period.

Charitable Giving – For those who are engaged in charitable giving, the Tax Relief Act includes a provision that had existed during the 2006 through 2009 tax years.  The provision permits the direct rollover of up to $100,000 of IRA funds to a qualified charity during a calendar year, without having to report the amount as a distribution from the IRA.  The Act also provides that gifts made in January of 2011 may be deemed made in 2010, including reducing the 12/31/10 fair market value for determining required minimum distributions. Qualified charities for this purpose are Sec. 501(c)(3) organizations, with the exception of non-operating private foundations and supporting organizations.
 
If you would like to discuss how the new legislation may affect your estate planning, please do not hesitate to contact a member of our Tax & Estates practice group.