The new estate tax rules and your estate plan


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The new estate tax rules and your estate plan

  1. 1. The New Estate Tax Rules and Your Estate Plan The Tax Relief, Unemployment Insurance The portability of the exemption coupled with an Reauthorization, and Job Creation Act of 2010 (the increase in the exemption amount to $5,120,000 per 2010 Tax Act) included new gift, estate, and taxpayer allows a married couple to pass on up to generation-skipping transfer (GST) tax provisions. $10,240,000 gift and estate tax free in 2012. Though The 2010 Tax Act provides that in 2011 and 2012, the this seems to negate the usefulness of A/B trust gift and estate tax exemption is $5 million (indexed for planning, there are still many reasons to consider inflation in 2012, and thus is $5,120,000), the GST tax using A/B trusts. exemption is also $5 million (indexed for inflation in • The assets of the surviving spouse, including 2012, and thus is $5,120,000), and the maximum rate those inherited from the deceased spouse, may for both taxes is 35%. New to estate tax law is gift appreciate in value at a rate greater than the rate and estate tax exemption portability: generally, any at which the exemption amount increases. This gift and estate tax exemption left unused by a may cause assets in the surviving spouses estate deceased spouse can be transferred to the surviving to exceed that spouses available exemption. On spouse. The GST tax exemption, however, is not the other hand, appreciation of assets placed in a portable. These major changes are temporary: absent credit shelter trust will avoid estate tax at the death further legislation, in 2013, the exemptions are of the surviving spouse. generally scheduled to drop to $1 million, theLooking ahead • The distribution of assets placed in the credit maximum rate will jump to 55%, and portability will beWithout further legislation in repealed. You should understand how these new and shelter trust can be controlled. Since the trust isthe interim, the provisions irrevocable, your plan of distribution to particular temporary rules may affect your estate plan.of the Tax Relief, beneficiaries cannot be altered by your survivingUnemployment Insurance Exemption portability spouse. Leaving your entire estate directly to yourReauthorization, and Job Under prior law, the gift and estate tax exemption was surviving spouse would leave the ultimateCreation Act of 2010 arescheduled to sunset, or effectively "use it or lose it." In order to fully utilize distribution of those assets to his or her discretion.expire, on January 1, 2013, their respective exemptions, married couples often • A credit shelter trust may also protect trust assetsat which time tax rates and implemented a bypass plan: they divided assets from the claims of any creditors of your survivingexemption amounts return between a marital trust and a credit shelter, or spouse and the trust beneficiaries. You can alsoto their 2001 levels (subject include a spendthrift provision to limit your bypass, trust (this is often referred to as an A/B trustto increases for inflation in plan). Under the 2010 Tax Act, the estate of a surviving spouses access to trust assets, thussome cases). deceased spouse can transfer to the surviving spouse preserving their value for the trust beneficiaries. any portion of the exemption it does not use (this • The portability feature is in effect for two years portion is referred to as the deceased spousal unused only, and is scheduled to expire in 2013, unless exclusion amount, or DSUEA). The surviving Congress enacts further legislation. spouses exemption, then, is increased by the DSUEA, which the surviving spouse can use for A/B trust plans with formula clauses lifetime gifts or transfers at death. If you currently have an A/B trust plan, it may no Example: At the time of Henrys death in 2011, he longer carry out your intended wishes because of the had made $1 million in taxable gifts and had an estate increased exemption amount. Many of these plans of $2 million. The DSUEA available to his surviving use a formula clause that transfers to the credit spouse, Linda, is $2 million ($5 million - ($1 million + shelter trust an amount equal to the most that can $2 million)). This $2 million can be added to Lindas pass free from estate tax, with the remainder passing own exemption for a total of $7,120,000 ($5,120,000 to the marital trust for the benefit of the spouse. For + $2 million), assuming Linda dies in 2012. example, say a spouse died in 2002 with an estate October 19, 2012 Page 1 of 2, see disclaimer on final page
  2. 2. Beware of the worth $5,120,000 and an estate tax exemption of $1 to make significantly greater gifts of premium"clawback" million. The full exemption amount, or $1 million, payments, which can be used to buy a larger lifeSay you make a gift in the would have been transferred to the credit shelter trust insurance policy.amount of the exemption in and $4,120,000 would have passed to the marital2012 ($5,120,000), then The increased exemption may also prove beneficial trust. Under the same facts in 2012, since the for same-sex couples whose estate planning is limitedyou die in 2013 when the exemption has increased, the entire $5,120,000exemption reverts to $1 due to a lack of gift or estate tax marital deduction. At estate will transfer to the credit shelter trust, to which least for 2012, assets of significant worth can bemillion, which it is currentlyscheduled to do. Will your the surviving spouse may have little or no access. transferred between partners without gift taxestate be taxed on the Review your estate plan carefully with an estate consequences.difference? This problem is planning professional to be sure your intentions willreferred to as the be carried out under the new laws. Before implementing a gifting plan, however, there"clawback" and while most are a few issues you should consider.practitioners believe it Wealth transfer strategies through • Can you afford to make the gift in the first placeultimately wont apply, there gifting (you may need those assets and the related cashis no legal documentation todefinitively refute that Because of the larger exemptions and lower tax rates, flow in the future)?possibility. 2012 provides an unprecedented opportunity for • Do you anticipate that your estate will be subject to gifting. estate taxes at your death? By making gifts up to the exemption amount, you can • Is minimizing estate taxes more important to you significantly reduce the value of your estate without than retaining control over the asset? incurring gift tax. In addition, any future appreciation • Do you have concerns about gifting large amounts on the gifted assets will escape taxation. Assets with to your heirs (i.e., is the recipient competent to the most potential to increase in value, such as real manage the asset)? estate (e.g., a vacation home), expensive art, furniture, jewelry, and closely held business interests, • Does the transfer tax savings outweigh the offer the best tax savings opportunity. potential capital gains tax the recipient may incur if the asset is later sold? The recipient of the gift gets Gifting may be done in several different forms. These a carryover basis (i.e., your tax basis) for income include direct gifts to individuals, gifts made in trust tax purposes. On the other hand, property left to (e.g., grantor retained annuity trusts and qualified an individual as a result of death will generally personal residence trusts), and intra-family loans. receive a step-up in cost basis to fair market value Currently, you can also employ techniques that at date of death, resulting in potentially less leverage the temporarily high exemptions to income tax to pay when such an asset is ultimately potentially provide an even greater tax benefit (for sold. example, creating a family limited partnership may also provide valuation discounts for tax purposes). Caution: The amount of gift tax exemption you used prior to 2012 will reduce the $5,120,000 available to For high-net-worth married couples, gifting to an you under the 2010 Tax Act. For example, a person irrevocable life insurance trust (ILIT) designed as a who used $1 million of his or her exemption prior to dynasty trust can reduce estate size while providing a January 1, 2012, will be able to make additional gifts substantial gift for multiple generations (depending on totaling $4,120,000 during 2012 free from gift tax. how long a trust can last under the laws of your particular state). The value of the gift may be Tip: In addition to this limited opportunity to transfer a increased (leveraged) by the purchase of significant amount of wealth tax free, its important to second-to-die life insurance within the trust. Further, remember that you can still take advantage of the the larger exemptions enable you to increase, gift tax $13,000 per person per year annual gift tax exclusion free, the premiums paid for life insurance policies that for 2012. Also, gifts of tuition payments and payment are owned by the ILIT or other family members. of medical expenses (if paid directly to the Premium payments on such policies are taxable gifts, institutions) are still tax free and can be made at any so these premium payments are often limited to avoid time. incurring gift tax. This in turn restricts the amount of life insurance that can be purchased. But the increased exemption in 2012 provides the opportunityIMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is notspecific to any individuals personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposeof avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or herindividual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believedto be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any timeand without notice. Page 2 of 2 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012