Recent Legal Developments

New Exemption Amount and Rate.
The 2010 Act sets the gift, estate and generation skipping transfer (“GST”) exemption at $5 million per person and $10 million per couple. An estate, gift, and GST tax rate of 35% will apply for transfers in excess of the exemption amount that are made in years 2011 and 2012, and for the estates of decedents who die in those two years. Absent further legislation, the changes made by the 2001 legislation still expire at the end of 2012.

Portability of Unused Exemption.
Under prior law, couples had to utilize elaborate estate tax planning tools to claim the combined estate tax exemption available to a married couple. Typical planning involved the funding of a “Bypass” or “Credit Shelter” trust on the death of the predeceased spouse. The new legislation allows the Executor of a deceased spouse’s estate to transfer any “deceased spouse unused exemption amount” (“DSUEA”) to the surviving spouse. The surviving spouse may apply the unused exemption amount to shelter assets subject to tax after the surviving spouse’s death without complex trust planning. The portability benefits will only be available for the estates of decedents dying after 2010. The benefit of a DSUEA was not made retroactive to January 1, 2010.

Reunification.
Prior to 2001, estate and gift taxes were unified under a single graduated rate schedule. A single lifetime exemption applied to both lifetime gifts and to testamentary bequests. Legislation enacted in 2001 decoupled these two systems. The 2010 Act reunifies the estate and gift tax systems with a common $5 million exemption. This provision in the 2010 Act is effective for gifts made after December 31, 2010.

Valuation Discounts.
The 2010 Act includes no restrictions on discount planning. Existing law that allows valuation adjustments to determine fair market value for estate and gift tax purposes remains unchanged. When valuation adjustments are combined with the $5 million gift tax exemption in 2011, a donor may transfer substantial wealth. Individuals should not overlook this opportunity to plan for transfers to younger generations.2010 Transition and Election Concerning Carryover Basis. Executors of estates of decedents who died in 2010 may elect to apply the $5 million estate tax exemption and step up in income tax basis provided in the new law, or pay no estate tax and have a modified carry over basis.

Conclusion.
The 2010 Act is very new. It is only just being analyzed by professional advisers. The law is potentially subject to modifications by technical correction acts. The new tax law gives us all a reason to give our estate plan a check-up. Whether or not estate taxes are a concern, the following items should be on the list:

  • Confirm that you have a durable power of attorney appointing a family member, friend or adviser as an agent to act on your behalf in financial and health care matters if you become physically or mentally unable to;
  • Be sure you have all the basic estate planning documents to leave your assets to the people or charities that you wish to benefit;
  • If you have a spouse, partner, or dependent children, provide for them financially;
  • Name a guardian for children who are minors or have special needs, and leave funds for them in a trust in case something happens to you;
  • Make sure that beneficiary designation forms, which cover both life insurance and retirement assets, name both primary and alternate beneficiaries. Do not name your estate as beneficiary — that could cause your heirs to lose important income tax benefits; and
  • Use trusts to hold money for minors, forestall spendthrift family members or protect assets from former spouses or creditors.

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