Market recap on estate planning.

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 spouse's estate
deceased spouse can be transferred to the surviving to exceed that spouse's 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, the
Looking ahead • The distribution of assets placed in the credit
maximum rate will jump to 55%, and portability will be
Without further legislation in repealed. You should understand how these new and shelter trust can be controlled. Since the trust is
the 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 surviving
Unemployment Insurance Exemption portability spouse. Leaving your entire estate directly to your
Reauthorization, and Job
Under prior law, the gift and estate tax exemption was surviving spouse would leave the ultimate
Creation Act of 2010 are
scheduled 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 assets
at which time tax rates and implemented a bypass plan: they divided assets from the claims of any creditors of your surviving
exemption amounts return between a marital trust and a credit shelter, or spouse and the trust beneficiaries. You can also
to their 2001 levels (subject include a spendthrift provision to limit your
bypass, trust (this is often referred to as an A/B trust
to increases for inflation in
plan). Under the 2010 Tax Act, the estate of a surviving spouse's access to trust assets, thus
some 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.
spouse's 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 Henry's 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 Linda's 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
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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 life
Say 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 marital
2012 ($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 limited
you die in 2013 when the exemption has increased, the entire $5,120,000
exemption 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 be
million, which it is currently
scheduled to do. Will your
the surviving spouse may have little or no access. transferred between partners without gift tax
estate be taxed on the Review your estate plan carefully with an estate consequences.
difference? This problem is planning professional to be sure your intentions will
referred 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 place
ultimately won't apply, there gifting (you may need those assets and the related cash
is no legal documentation to
definitively 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, it's 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 opportunity
IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not
specific to any individual's 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 purpose
of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her
individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed
to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time
and without notice.
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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012