I. 2011/2012 Gifting Before Sunset
A. $5 million exclusion amount for gifts/estate/Generation Skipping Tax (GST)
B. Change of planning strategies
1. Gifts to Grantor Trusts rather than sales
2. Restructure prior sales that used guarantees
3. Increase use of Qualified Personal Residence Trusts (QPRTs)
4. Gift splitting up to $10 million
5. Larger gifts to life insurance trusts to avoid Crummey letters
C. Claw Back on Sunset
1. Example: Decedent has $6 million. Gifts $5 million in 2011 and dies on January 1, 2013. Decedent’s estate is $1 million. If 2010 law sunsets in 2013, the $5 million gift will be added back into calculation of the Decedent’s taxable estate and the Decedent will receive zero gift tax credit since no gift tax was paid on the $5 million gift in 2011, thereby creating a taxable estate of $6 million (tentative tax before other credit will be $2.94 million).
D. New York State gift tax issues
1. May bring back gift tax
2. Taxes gifts in excess of $1 million on death
a) Example: Decedent makes a $5 million gift in 2011. The gift will be added back into the calculation of the Decedent’s estate for NY estate tax purposes. New York estate tax is based on the pre-2001 Federal 706 calculation for state death tax credit.
E. Grantor Retained Annuity Trusts (GRATs)
1. Ten (10) year minimum term for GRATs and 10% remainder proposals not included in 2010 law. Therefore, tolling two (2) year GRATs still permitted
F. Valuation Discounts
1. No loss in valuation discounts for family entities under 2010 law
II. Portability and Drafting (Hospice Marriage Act of 2010)
A. The deceased spousal unused exclusion amount (DSUEA) is the lesser of the basic exclusion amount in the year of death or the unused exclusion amount of the surviving spouse’s last deceased spouse taxable estate plus adjusted taxable gifts.
B. Executor must make election to permit surviving spouse to utilize deceased spouse’s unused exemption
C. Portability is not a default estate planning tool!!!!
D. Does not apply to the GST exemption
E. Does not apply to nonresident alien spouses
F. QDOTs still necessary for noncitizen
G. Only the most recent deceased spouse’s unused exemption may be used by the surviving spouse even if the last deceased spouse has no unused exclusion remaining or last deceased spouse does not make a timely election.
H. No asset protection for subsequent marriages. New spouse of surviving spouse may have no unused exemption.
I. Expires on December 31, 2012
J. Still many Non-taxable reasons to use trusts
1. Centralized trustee/management of assets
2. Allocation of GST tax
3. Second marriages
5. Ability to sprinkle corpus to children
III. 2013 Possibilities
A. 2010 law becomes permanent
1. $5 million estate/gift/GST tax exemption
2. 35% estate tax rate
B. 2010 law is extended beyond December 31, 2012
C. Congressional gridlock
1. Revert back to 2001 law ($1 million exemption; 55% estate tax rate) “as if EGGRTRA never existed”
D. Full repeal of 2010 law
1. Expect only 5,000 or 6,000 Form 706s to be filed in 2011/2012; or
2. No money, high deficits, etc. so government will need estate tax
IV. Planning for Estates under $10 million in 2011 and 2012
A. New York State death tax is new focus here.
1. New York State estate tax exemption remains at $1 million
2. EPTL §2-1.13 says fund Credit Shelter Trust with: 2009 $3.5 million amounts or $5 million?
B. Disclaimer Trusts not ideal because no special power of appointment to get assets out; disclaimers may result in direct skips for GST purposes.
C. Credit Shelter Trusts are no good because State estate tax and repeal in 2013 uncertainty
D. Use One-Lung QTIPs with the ability to have the Trustee give the surviving spouse a general power of appointment or full discretionary rights to the Trustee so surviving spouse can get step up if repeal carries over basis year. QTIP not in estate of surviving spouse in repeal year.
E. Lock in $5 million exemption by utilizing inter vivos QTIP trusts
F. Use QPRTs freely
G. Irrevocable Life Insurance Trusts (ILITs) Transfers of policies with high cash value easily
H. Flexibility in drafting reigns supreme - use Independent Trustee’s to decant/amend/general power of appointments.
V. Continued Use of Grantor Trusts for Sales/Gifts
A. Higher income tax rates are likely
B. Historical low 7520 rates
C. Maintain cash flows
D. Issues on death of Grantor (3 possibilities):
1. Worst: at death, all gain and no step-up (elect out)
2. Middle: No gain and full step-up
3. Best: gain is recognized on sale not at deathE. Seed money and guarantee is not issue in 2011/2012 for trust transfers by husband and worth $100 million because $10 million seed (use each spouse’s $5 million gift tax exclusion amount as seed)
Circular 230 Disclosure:
*** The Treasury Department has newly promulgated Regulations effective June 20, 2005, that applies to those attorneys and accountants (and others) practicing before the IRS that require such individuals to provide extensive disclosure in certain written communications to clients. In order to comply with our obligations under these Regulations, we want to inform you that since this communication is not intended to and does not contain such disclosure, you may not rely on any tax advice contained in this document to avoid tax penalties.