Estate and Gift Tax Demise? Part 1 of 3

Introduction

In late December, 2010, President Obama struck a tax compromise with Republicans regarding income, estate and gift taxes.

Through 2012, income taxes remain frozen, however, gift and estate taxes are eliminated for all but the very richest Americans.

Changes

The estate and gift tax exemption is worth $5.0 million ($10.0 for husbands and wives) and will be increased for inflation after 2011.

The law became effective for those dying after January 1, 2010 and is set to expire on December 31, 2012, although most tax professionals believe the law will remain. Estates exceeding these exemptions will be taxed at 35% (down from the 45%).

Gifts

The most striking feature of the new law involves the gift-tax rules.

The annual gift-tax exemption of $13,000 per beneficiary (and indexed for inflation) still applies, however, the lifetime gift-tax exemption, which is in addition to the annual exemption, has been increased from $1.0 million to $5.0 million ($10.0 million for married couples).

Thus, the new gift tax rules provide a major wealth transfer opportunity for those with large family land and stock holdings, as well as family businesses.

Unused Exemptions

For married couples, the exemption is now treated as a collective $10.0 exemption (rather than two individual $5.0 million exemptions), which means that any unused portion of the exemption after the death of the first spouse transfers to the surviving spouse.

Under prior law, each spouse held the exemption personally, which meant that complicated multiple trust arrangements were required to maximize the exemptions.

These new “portable” exemptions, eliminate the need for the traditional three-trust setup (a credit shelter trust, a marital Q-TIP trust and a survivor’s trust) to minimize taxes

NOTE: Couples with estate plans designed to minimize estate taxes should review them in light of the increase in exemptions.NOTE: The portability of the unused exemption may be reduced or lost if the surviving spouse remarries and outlives the new spouse. The surviving spouse receives the unused exemption from the last surviving spouse – thus, the size of a potential spouse’s estate-tax exemption may become an important marriage consideration!

GST

The generation-skipping tax (GST) exemption is now equal to the estate-tax exemption of $5.0 million ($10.0 for married couples). However, there is no portability of the GST exemption.

Use of the traditional by-pass trust will probably continue for those seeking to leave assets to grandchildren or others who are subject to the GST

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