May 1, 2012: Estate Planning Update: Window of Opportunity Closing on "Golden Age" of Estate Planning

To Our Clients, Friends and Colleagues:

As we have advised you in the past, several expiring Bush tax cuts were extended through December 31, 2012. In mid-December, 2010, Congress passed a tax relief act (“the Act”), which included temporary estate tax relief for 2011 and 2012. However, the provisions of the Act are set to expire at the end of this year and the window of opportunity to take advantage the current estate and gift tax laws is closing fast. The estate and gift tax changes implemented by the Act included the following:

  1. Rise in the Estate Tax Exemption. The estate tax exemption was raised to $5M for 2011 and $5M+ for 2012 (since it is indexed for inflation).

  2. A Drop in the Estate Tax Rate. The Act decreased the estate tax rate. The top rate was 45% in 2009 and it was lowered to 35% for 2011 and 2012.

  3. Rise in the Gift Tax Exemption. The Act increased the lifetime gift tax exemption. The gift tax exemption was $1M in 2009 and it was raised to $5M for 2011 and $5M+ for 2012.

  4. Federal Estate Tax Exemption Portability Was Established. The Act established the concept of the portability of the federal estate tax exemption. This means that if a spouse dies without an estate plan which uses formula trust provisions to make use of both spouses’ exemptions, and/or has any unused estate tax exemption, the unused portion of the decedent’s $5M federal exemption may be “passed” to his or her spouse. However, the decedent’s personal representative must file a Federal Estate Tax Return to report the amount of the exemption to be passed on to take advantage of this tax opportunity.

  5. Extension of the Charitable Rollover for IRAs. IRA owners who are at least age 70-1/2 may direct distribution of up to $100,000 of their IRA benefits to charity in 2011, which “counts” as their required minimum distribution for the year. This provision, which was available in 2008 and 2009, provides many advantages to those people who have philanthropic goals. The Act extended this provision for 2010, albeit too late for many to use it, and for 2011. The extension of this provision for 2012 continues to be debated.

  6. The Act Creates a Two Year Window: All New Provisions Expire on December 31, 2012. Although we all hoped to see more certainty, the charitable rollover was only available for 2011 and the rest of these new provisions are only in effect through the end of 2012.

These provisions offer a unique opportunity for expansive estate tax planning that some commentators have characterized as a "Golden Age of Estate Planning." However, as we move closer to the end of 2012, it continues to appear more and more likely that the Golden Age will come to a close. It is quite likely that many, if not all, of the above benefits will either be modified or repealed by Congress, or they may simply disappear on December 31, 2012.

The result could be that on January 1, 2013:

  • A $1M estate tax exemption is enacted rather than $5M+;

  • A 45% or higher estate tax rate is in place rather than 35%;

  • A $1M gift tax exemption is enacted rather than $5M+;

  • Estate tax portability is eliminated;

  • Tighter and more restrictive rules are adopted on gifts to trusts, such as gifts to GRATS and transfers to defective grantor trusts; and

  • Tighter and more restrictive rules are adopted on transfers to limited partnerships or limited liability companies, or there might be a total elimination of the opportunity to make discounted gifts of interests in limited partnerships or in limited liability companies.

What to Do Now?

This is just a brief discussion of the more important estate tax law changes. As stated above, the window on many of these benefits may close by December 31, 2012, if not sooner. Everyone should determine how best to utilize these estate and gift tax rules under their estate plan. Now may be the best time to take advantage of these opportunities. You simply cannot afford to wait until this fall to decide to implement proper planning because it is likely your attorneys, accountants or other financial advisers will be flooded with other similar planning engagements.

If an individual is contemplating lifetime gifts, now is the time to take advantage of the $5M+ gift tax exemption and related entity and estate planning opportunities. We encourage everyone to review their estate planning documents and seek professional advice on the impact of these changes on their estate plan. We welcome the opportunity to meet with you soon to discuss how you may be able to take advantage of the current estate and gift tax laws.


Braun Siler Kruzel PC