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Winter 2011

Estate Planning Bulletin

Federal Estate and Gift Tax Relief through 2012

The recently-passed Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the Act) temporarily changes the federal estate and gift tax regime and includes some unexpectedly generous provisions. (Click here for a printable copy of the bulletin.)

Estate Tax
For 2011, the estate tax exemption is $5 million per person (up from the 2009 exemption of $3.5 million) and for 2012 the $5 million exemption amount will be adjusted for inflation.  The rate of tax is set historically low at 35%.   The “portability” provision, discussed below, provides unprecedented flexibility for married couples with a combined $10 million exemption.

Gift Tax
For many families, the most dramatic change under the 2010 Act is the increased gift tax exemption.  In 2010, an individual paid a gift tax of 35% for gifts in excess of the $1 million lifetime exemption, but for 2011 and 2012, an individual can make gifts of up to $5 million (adjusted for inflation as indicated above) as taxable gifts during life without incurring any federal gift tax.  The increase in the gift tax exemption creates excellent opportunities for families who want to pass on their businesses, family real estate or other appreciating assets to their children and other beneficiaries.  The gift tax and estate tax exemptions are now unified, so any of the exemption not used for gifts during life generally can reduce or eliminate federal estate taxes at death.

Portability of Exemptions
The 2010 Act introduces a new concept: “portability” of the gift/estate tax exemption between spouses.  Under prior law, exemptions for married couples were available to each person on a “use or lose” basis.  During 2011 and 2012, if one spouse dies and does not take advantage of the full $5 million exemption, the surviving spouse can carry over any unused exemption, as long as a federal estate tax return is completed, the unused exemption is transferred to the surviving spouse and if the surviving spouse remarries, the new spouse doesn’t die first.  This will permit couples with total taxable estates under $10 million to pass their assets by lifetime gift or at death, free of federal gift and estate tax, and to enjoy the simplicity of joint ownership of assets, estate plans without trusts, or naming a spouse as the direct beneficiary of life insurance, annuities and retirement plans or accounts.

Generation-Skipping Transfer Tax
In 2011 and 2012 the generation-skipping tax rate, like the estate and gift tax rates, will be 35%.  The generation skipping transfer tax exemption in 2011 will be $5 million, also adjusted by an inflation increase in 2012.  Many existing trusts may now be extended into future generations without worrying about incurring this tax.  Portability does not apply to the generation-skipping tax.

For 2010 Decedents – Executor’s Choice
In our last Estate Planning Bulletin we discussed the fact that there was no federal estate tax in 2010, but the date of death “step-up” in basis rules were replaced with an adjusted “carry-over basis.”  However, Congress retroactively reinstated the estate tax for decedents who died in 2010 – with a $5 million exemption, 35% rate and the step-up in basis, but included a provision permitting executors to “opt out” of the estate tax, thereby saving on federal estate taxes but forfeiting some of the step-up in basis.  This unusual provision will force executors to consider the following:

  • If the decedent died with less than a $5 million taxable estate (including lifetime taxable gifts), it will often be better to report under the federal estate tax régime.  No tax will be owed, and the beneficiaries will receive all assets with a “stepped-up” (or date of death) basis.
  • If the decedent died with more than a $5 million taxable estate, it may be less expensive to opt out of the 35% federal estate tax and pass on the decedent’s basis to the beneficiaries.

Massachusetts Estate Tax Remains the Same
The Massachusetts estate tax is unchanged.  It will retain a per-person threshold of $1 million with no portability.  There is no gift or generation-skipping transfer tax under Massachusetts law.

How does this affect your estate plan?

  • Because the 2010 Act applies for only two years and is not “permanent,” we still are facing uncertainty after 2012.
  • High net worth individuals may want to consider increased gifting in 2011 and 2012 to take advantage of this two-year window of opportunity to remove significant wealth from their estates, particularly by funding generation-skipping trusts.
  • The federal estate tax may be less of a driving force in the design of many estate plans.
  • Trusts may be useful in order to benefit from the first decedent’s Massachusetts $1 million threshold and for many personal reasons, such as second marriages or to protect children.  For many people, trusts designed to minimize or eliminate federal estate tax may not be needed under the new law.  Nonetheless, the uncertainties created by a two-year law still require caution, and some clients may want to retain federal credit shelter and marital deduction trusts at least on a “standby” basis.
  • It may be possible to simplify your estate plan, or to include terms that allow for more simplicity if the estate tax regime in the 2010 Act stays in place.

We will be happy to review your plan and discuss options with you.  Please contact any member of our Estate Planning and Administration Department.

Kathleen L. Bernardo 413-272-6295 [email protected]
William E. Hart [email protected]
Elizabeth H. Sillin 413-272-6296 [email protected]
Ronald P. Weiss 413-272-6259 [email protected]

To comply with U.S. Treasury regulations, we inform you that any tax advice contained in this bulletin is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.