Review of Existing Estate Plans in Light of 2011 Federal Tax Law Changes

Review of Existing Estate Plans in Light of 2011 Federal Tax Law Changes

By:  David R. Schoenhaar, Esq.*

As of January 1, 2011, new legislation went into effect that: (i) significantly changed the Federal estate, gift and generation-skipping transfer ("GST") tax rates, (ii) unified exemption amounts and (iii) introduced the concept of  "portability" to help avoid wasting unused exemptions.  As we have experienced with the Federal estate tax repeal in 2010, this new law also sunsets and, thus, planning opportunities must be addressed now since there is no telling whether Congress will extend the new provisions discussed below into 2013 and beyond.

Tax Rates

In 2011, the maximum estate, gift and GST tax rates decrease from 45% to 35% and the "step-up" basis rules for inherited property remains intact.  This lower rate will apply for 2011 and 2012, as well as for 2010 through the retroactive reinstatement of the Federal taxes.  Fiduciaries for decedents dying in 2010 can elect to "opt out" of the estate tax but the tradeoff is that the estate's assets will be subject to the modified carry-over basis rules.

Exemption Amounts

The new law reunifies the estate, gift and GST exemption amounts to $5,000,000, subject to adjustments for inflation for those years beyond 2011.  This change increases the gift tax exemption amount by $4,000,000 (from the previous exemption amount of $1,000,000), significantly expanding one's ability to make lifetime transfers without incurring a gift tax.  Additionally, the gift tax annual exclusion continues in 2011 and 2012 at $13,000 (or $26,000 if spouses elect to split gifts) for those who wish to continue utilizing annual tax-free gifting opportunities.

The estate and GST exemption amounts have jumped from $3,500,000 to $5,000,000.  Given reunification, a couple can now transfer a total of $10,000,000 either during their lifetime, or at their death, free of estate, gift and GST tax. 

These increased exemption amounts necessitate a review of one's estate planning objectives to determine if the newly available gift exemption amount should be utilized toward additional estate planning techniques before 2013.  For example, those who resisted incurring a gift tax by limiting their lifetime gifting to $1,000,000 should revisit their gifting strategies to potentially transfer another $4,000,000 gift and GST tax free.

Portability

To help assist taxpayers in utilizing each spouse's gift and estate tax exemption amounts, the new law has introduced a concept referred to as "portability."  Under the old law, if an individual dies without utilizing all of his/her gift and estate tax exemption amount, that unused portion was lost.  Conversely, under the new law, a surviving spouse may use the unused exemption of his/her deceased spouse who dies after 2010.  For example, if Spouse-A dies in 2011 using only $1,500,000 of his/her exemption amount because the bulk of the assets were in Spouse-B's name, then Spouse-B will have his/her $5,000,000 exemption amount plus Spouse-A's $3,500,000 unused exemption amount for a total of $8,500,000. 

While portability provides a degree of flexibility that was previously absent, one should rely on this concept with caution.  First, portability must be affirmatively elected on the estate tax return by the fiduciary of the first spouse to die.  Secondly, by relying solely on portability and failing to balance each spouse's estate prior to the first death, the main advantages to placing assets in a bypass trust are lost.  These advantages include creditor protection and the ability to avoid estate tax on appreciation related to those assets during the period between each spouse's death.  Finally, the GST exemption and the New York estate tax exemption (currently $1,000,000) are not portable.  Given these important shortcomings, it is recommended that portability be a plan of "last resort" and not an alternative to structuring estate plans in which both spouses fully utilize their exemptions.

In light of the very substantial changes outlined above, it is critical that clients and their advisors review existing estate plans and re-assess current planning initiatives. 

*David R. Schoenhaar, Esq., is an associate at Ruskin Moscou Faltischek, P.C. and is a member of the firm's Trust and Estates Planning and Litigation Department.