One of the most important things to know regarding the changes effectuated by the Tax Relief Act is that they are temporary. Unless Congress takes further action within the next two years, there will be a reinstatement in 2013 of pre-2001 rates (55% for estates and lifetime gifts) and exemptions ($1 million for estate and gift taxes, and approximately $1.35 million for GST taxes). It is widely expected that this problem will become a major issue in the 2012 presidential election.

For 2011-2012:

Estate Tax-The estate tax has returned with a larger exemption of $5 million and a lower tax rate of 35%.

Gift Tax-The estate and gift tax exemption now are reunified, so that everyone now has a lifetime gift exclusion amount of $5 million per person and a 35% gift tax rate for gifts over $5 million.

Exemption Portability -The Tax Relief Act provides for "portability" between spouses resulting in a maximum exemption of $10 million ($5 million per spouse) for a married couple. Portability allows a surviving spouse to elect to take advantage of the unused portion of the estate tax exemption of his or her predeceased spouse, upon their death. However, such portability is assured only for two years and the availability of this portable exemption amount requires an election to be made on a timely filed federal estate tax return. There is no portability for any unused Generation skipping Tax exemption.

Generation Skipping Tax (GST) -For transfers made in 2011, the GST exemption is $5 million, indexed for inflation beginning in 2012. The GST tax rate for 2011 and 2012 will be at a 35% tax rate. The GST tax exemption is not portable;

Option for 2010 Deaths- The Act gives those estates the option to elect to apply the estate tax based on the new 35 percent top rate and $5 million exemption, with stepped-up basis or to comply with the 2010 rules. Although there was no estate tax in 2010, some inherited assets were subject to higher capital gains tax under the 2010 rules, a situation that actually raises the tax burden for some heirs. While most heirs would choose the 2011 option, the heirs of some wealthier decedents may find it more advantageous to elect the 2010 law.

Estate Planning Valuation Discounting Vehicles-The Act does not limit any existing estate planning discounting vehicles such as Grantor Retained Annuity Trusts (GRATs), Family Limited Partnerships (FLPs), which had been originally proposed by Congress.

Do I still need to plan?

The answer is yes.  The current favorable federal estate tax rules run only through 2012. No one can predict what will happen after that. At a minimum, you still need to have documents in place that adequately address the following issues:

Creditor protection-This is achieved with properly structured   credit shelter/bypass trusts and marital trusts, for example. Additionally, appreciation of assets placed in the credit shelter/bypass trusts will escape estate taxation in the survivor's estate. Further, the new portability is dependent on the executor making an election to pass the remaining exemption amount to the surviving spouse and filing a timely estate tax return. It could, in some cases slip through the "cracks".

Ensuring your wishes are followed in terms of the oversight/management of family assets, dependents' or aged parents' care, and business interests; who will be in charge of your affairs after your death.

Addressing specific planning challenges; planning to protect interests of  beneficiaries that may have spending problems, special needs, substance abuse problems, divorce issues or are just too young to receive a significant amount of property. Special planning may be required when there are children from previous marriages. Protecting beneficiaries in these situations is a crucial estate planning goal, regardless of tax considerations.

Having a plan in place in the event that you become physically or mentally incapacitated during your lifetime; Designating who will take care of your personal and health needs and who will manage your assets.

How do the changes affect my current planning? What about my existing will and trusts?
  

Documents executed before 2011, should be reviewed by an attorney to make sure your wishes will be actualized in light of tax law changes. Problems with spouses being inadvertently excluded can arise with wills crafted with trust/exemption formulas that were based on the previously lower exemption amounts.

For example:  When you wrote your will, you were married and had an estate of $5 million; the federal exemption amount at that time was $2 million and you included a trust that was to be funded with the maximum exemption amount. As a result, $2 million would have gone into the trust tax free; the other $3 million would have passed tax free to your spouse. Without any changes, if you die before 2013, since $5 million is now the exemption amount, all of your property will go into the trust and nothing will pass outright to your spouse.

The new "use it or lose it" planning opportunities

Taking Advantage of the New Increased Gift Tax Exemption- Conditions for gifting have never been better in modern times. Under the new law we have a $5 million unified estate, gift, and generation skipping exemption (indexed for inflation) and a 35% combined estate, gift and GST tax rate. Add to that, historically low federal interest rates, relatively low asset values and no legislation at this time restricting the use of various effective wealth transfer tools, such as the Grantor Retained Annuity Trusts (GRATs), Family Limited Partnerships (FLPs), Intentionally Defective Grantor Trusts (IDGTs), Generation Skipping Tax Trusts for Grandchildren and/or valuation discounts on family controlled enterprises.

Therefore, many now see a "use it or lose it" opportunity to transfer a significant amount of wealth tax-free. It is important to remember that you can still take advantage of the $13,000 per person per year gift tax annual exclusion for 2011 and 2012. Also, gifts of tuition payments and payment of medical expenses (if paid directly to the institutions) are still tax-free and can be made at any time. Predictions are that the largest transfer of wealth in our history will occur over the next two years.

Life Insurance-The Tax Relief Act does not change the role of life insurance in your estate plan. There are still many important reasons for life insurance other than just being used to pay potential federal estate taxes. For example, life insurance will still be needed to fund business buy-sell agreements; to serve as an income replacement for a spouse or dependents of a family's sole wage earner; and to provide estate liquidity. For those who own a significant amount of life insurance, an irrevocable life insurance trust (ILIT) still remains an important planning technique to exclude life insurance proceeds from your gross estate. For those delaying life insurance purchase decisions, keep in mind that we do not know how taxes will be structured  two years from now and that one never knows how one's personal health and insurability may change over a two year period.     

Our recommendation

In light of the changes in the estate and gift laws this is a time to review current planning to make sure it remains effective and to consider ways to possibly take advantage of some valuable planning opportunities that may not be as favorable in the future.

For more information regarding estate planning, please call our law office at

(305) 931-3200.