New Tax Law Brings Unprecedented Gift and Estate Planning Opportunities

Our new year wish for our clients was for permanent estate tax reform. The tax compromise that President Obama signed into law in December 2010 delivered on half of that wish. It includes unprecedented, taxpayer-friendly changes to the federal estate, gift and generation-skipping transfer taxes. Unfortunately, the new law is not permanent. Rather, it is set to expire after 2012.

For the next two years the new tax law brings significant gift, estate and generation-skipping planning opportunities.

Gifts

First, the lifetime gift tax exemption now is $5 million. That's a big increase from the $1 million exemption that was in place through 2010. Individuals with large estates should consider making sizeable gifts over the next two years. Doing so can remove the gifted property from the donor's taxable estate, along with all future income and appreciation derived from the property. For taxable gifts that exceed the $5 million exemption amount, the gift tax rate for 2011 and 2012 is 35 percent. This is the lowest rate in recent history, and a meaningful break from the top tax rate of 55 percent scheduled to re-appear in 2013.

Transfers to Grandchildren

Gifts to grandchildren, great-nieces and great-nephews, or others who are more than a generation younger than the donor also are particularly advantageous if made in 2011 and 2012, because the separate generation-skipping transfer tax exemption also has been increased to $5 million.

Property Passing at Death

Individuals who die in 2011 or 2012 can transfer up to $5 million of property to their heirs without paying any federal estate tax. Beginning this year, the gift and estate tax exemptions are re-unified, so that the amount of property that can be transferred estate tax-free at death is reduced by the amount of taxable gifts the decedent made during life. And transfers to a surviving spouse or charity continue to be estate and gift tax-free.

Portability

Under the new tax law a decedent who was married can pass his or her unused gift and estate tax exemption amount at death to the surviving spouse. For example, if a decedent made no taxable gifts during her lifetime, and left all of her property to her spouse, then when the surviving spouse later passes away, he could transfer up to $10 million of property to his heirs. This new "portability" feature of the gift and estate tax exemption relieves many married couples of the need to establish a "credit shelter trust" fund when the first of them passes away. Caution is warranted, however, because this benefit goes away after 2012. In 2011 and 2012, the decision to plan, or not to plan, for a credit shelter trust fund at the first spouse's death will depend on a variety of factors.

Flexibility and New Opportunities

Given the constant shifting of the gift, estate and generation-skipping transfer tax laws, we encourage clients to approach estate planning with flexibility in mind. Our clients should use tried-and-true tax planning methods, and also remain positioned to take advantage of the new opportunities and benefits brought by the 2010 tax law.

If you have questions about how the new tax law could affect you or your estate plan, please call any of the partners of Ice Miller's Personal Services, Trusts and Estates Group, or Gordon Wishard, Richard Johnson, Gina Giacone, Kristine Bouaichi, Kevin Alerding or Andrew Vento.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

CIRCULAR 230 DISCLOSURE: To ensure compliance with recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication is not intended or written by us to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the federal government or for promoting, marketing or recommending to another party any tax-related matters addressed herein.