January 13, 2011
Federal GST, Estate and Gift Tax Laws Under the 2010 Tax Act
Last year at this time we were still holding out hope that Congress would act quickly to pass the estate tax legislation that we were sure was inevitable. The months passed by...and still nothing. Until December 17, 2010, when the Tax Relief Act ("TRA") of 2010 was passed. Illinois responded in kind by passing its own estate tax law on January 13, 2011.
The TRA of 2010, effective for two years, through December 31, 2012, contained several provisions which affect estate and gift tax planning, as well as estate administration for those decedents who passed away in 2010. First, for estates of 2010 decedents, there is an option for the estate to utilize the "old" 2010 law, or to elect to have the new TRA rules apply retroactively. The "old" 2010 law provides for no federal estate tax, nor generation-skipping transfer tax, to apply to a decedent's estate regardless of the size of the estate, but limits the amount of the cost basis step-up that can be applied to offset capital gain on the sale of appreciated assets after a decedent's death. The new TRA law exempts the first $5.0M from estate tax, and provides automatic cost basis step-up for all assets comprising the decedent's estate. There are many and varied reasons to elect one regime or the other, and no two estates are alike. The new law also extends the filing deadline for both Federal Estate Tax Returns (Form 706) and Qualified Disclaimers applicable to 2010 decedents. We strongly urge the families of 2010 decedents to seek legal counsel before filing death benefit claims, or otherwise making changes to how assets are titled. We will prepare an analysis for you to determine the best approach, and guide you through whichever option turns out to be the most beneficial.
With regard to estate planning, the TRA of 2010 increases the estate and gift tax exclusion amount to $5.0M per estate. The estate and gift tax rate for transfers in excess of the exclusion is 35%. If you recall, in 2009 when the estate tax exclusion amount was $3.5M, the gift tax exclusion amount remained at $1.0M. With this new law, a donor's aggregate lifetime gifts of up to $5.0M are exempt from gift tax. The gift tax exclusion increase is not retroactive; the $1.0M exclusion still applies for gifts made in 2010. The annual gift tax exclusion is currently $13,000. The gift tax exclusion has never been higher than $1.0M, so this is an unprecedented opportunity to institute a gifting plan to pass value to your loved ones. We would be happy to explain the benefits of grantor retained annuity trusts ("GRATs"), Qualified Personal Residence Trusts ("QPRTs"), or any of the other vehicles available to not only transfer value, but to use discounts to maximize the value transferred while using the least amount of your gift and estate tax exclusion.
The generation-skipping transfer ("GST") tax exemption has also been increased to $5.0M for transfers made in 2010, 2011 and 2012. The tax rate on GST transfers made in 2011 and 2012 in excess of the GST exclusion amount is 35%. The tax rate for GST transfers in 2010 is 0% (this is retroactive). The new, higher gift tax exclusion, combined with the increased GST exclusion, provide some wonderful opportunities to pass wealth on to future generations free of transfer tax. Ask us about "dynasty trusts" that can be used to transfer wealth to multiple generations.
On January 13, 2011, the Illinois legislature passed a law imposing an estate tax on estates in excess of $2.0M. This is, for all practical purposes, identical to the law that was in effect through December 31, 2009. There is a "QTIP (tax) election" available to a surviving spouse that would defer the Illinois tax until the second death, but careful planning is necessary in order to maximize utilization of the federal exclusion amount while still being able to take advantage of this Illinois estate tax election. There is no Illinois gift tax, meaning lifetime gift planning may be advisable in many situations in order to minimize the Illinois estate tax on death.
Each client situation is unique, and the Tax Relief Act of 2010 and the Illinois estate tax affects each estate plan differently. Those with potentially non-taxable estates may benefit from simplifying the language in their existing documents. Those with larger estates may find this to be a great time to contemplate additional gifting strategies. If you wish to review and update your estate plan with one of us, please contact our office to arrange an appointment, or feel free to contact Chas, Kim or Carrie directly with any questions. We look forward to hearing from you.