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Closing Doors: How the Government Is Affecting Our Community Services.  

 

by Stephen W. Dale, Esq., The Dale Law Firm, PC  

I've said it before, and here I am, saying it again.  Times are tough, and the future is uncertain.  Here in California we are facing unprecedented government cutbacks.  Our State Capitol is battling through some of the most severe budget cuts in our history.  Most other states are going through the same experience.  

Stephen W. Dale, JD

The Dale Law Firm, PC 

 

This article was adopted from an article written by our colleague, Brian Rubin, a member of the Special Needs Alliance in Illinois and a leading advocate for the disability community. To learn more about Brian Rubin and his practice, go to www.snfp.net .

 

On December 17, 2010 Congress enacted the 2010 Tax Act (the official name is the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010). The following is a short synopsis of some of the changes to the Federal Estate, Gift and GST taxes, which expire in two years unless Congress acts to prevent this result.

1. The Federal Estate Tax Exemption has been raised for 2011 and 2012 to $5,000,000 for each individual.  Beginning in 2012 the $5,000,000 exemption is indexed for inflation, unless it reverts back to $1,000,000 in 2013.
2. The Gift Tax Exemption which was previously set at $1,000,000 has also been raised to $5,000,000 for each individual.  This reunites the Federal Estate and Gift Tax Exemption.  
3. The Federal estate and gift tax rate has been lowered from 45% in 2009 to 35% for the years 2011 and 2012 for gifts that exceed the Federal Estate and Gift Tax Exemption.
4. The GST tax exemption, which represents the amount of property that can be passed by skipping a generation (i.e. gifts by grandparents to grandchildren), has also been increased to $5,000,000 for 2011 and 2012, with a top rate of 35%. 
5. The 2010 Act provides that the surviving spouse may use any unused estate tax exemption of the first spouse to die ("Portability").  This does not apply to the GST exemption.
6. The estate tax law prior to 2010 provided for a full step up in basis for purposes of capital gains tax on the assets included in the estate of a decedent.  This law has been restored and the carryover basis regime which may be elected for 2010 decedents will no longer be applicable for 2011 and 2012.

 Those with under $5,000,000. For the years 2011 and 2012, Congress has given everyone a $5,000,000 exemption from the gift, estate, and generation-skipping taxes. Unfortunately, the exemption automatically decreases to $1,000,000 on January 1, 2013 unless Congress extends it. Remember that Congress did not act to extend the 2001 tax provisions for 2010, until 2010 was almost over. There is no guarantee of what Congress will do in the next two years. It is possible that:

• Since Congress has never before decreased the estate tax exemption, but rather has only periodically increased the exemption, that it is unlikely to do so this time, in which case we would assume a $5,000,000 exemption will be with us for many years.
• Or, we could reasonably conclude that in 2012 the economic, political, and tax situations will be different and favor a tax increase which would suggest a reduced exemption to an amount between $1,000,000 or lower, and $5,000,000.
• Or, we could reasonably expect gridlock in which case $1,000,000 exemption will be the default result after 2012.

Individuals and couples with less than $5,000,000 may be able to simplify their planning and in most cases we are recommending that our clients convert their trust to contain a "disclaimer" provision to allow the surviving spouse to decide whether to split the estate or leave the remaining assets directly to the surviving spouse. For example, they may have trusts that should be modified or terminated to reduce administrative costs and complexity. In some instances the prudent course may be to wait a year or two to see in what direction Congress goes but the issue is worth review and discussion now. Even so - for the vast majority of our clients we are counseling them to

 

Married Couples with between $5,000,000 and $10,000,000. Married couples with in these parameters may be fully protected in 2011 and 2012, but we do not know what will happen in subsequent years. Regardless, the Act gives married couples a new benefit, namely the ability of a surviving spouse to use the unused exemption of a deceased spouse (commonly referred to by the short-hand "portability"), that should be considered.

 

Example - Suppose Jim dies in 2011 with a $3,000,000 estate all of which passes into a trust for the benefit of his wife, Mary, and their children. Jim's estate has a $5,000,000 exemption of which $2,000,000 would not be used. Then in 2012 Mary dies with a $7,000,000 estate. Before the recent change, Mary's estate would have paid estate tax because her $7,000,000 estate would have exceeded her $5,000,000 exemption.  

However, the portability feature of the new Act allows Mary's estate to use Jim's $2,000,000 unused exemption, so her estate will pay no tax. Portability may be very helpful but cannot be relied on. For instance, if a surviving spouse remarries then the use of the deceased spouse's exemption appears to be lost. We will want to discuss how to make the best use of the portability benefit under the new law.

 

Individuals with more than $5,000,000 and married couples with more than $10,000,000. The new Act creates many opportunities to reduce eventual estate taxes because the $5,000,000 exemption applies not only to estates but also to gifts. For the last decade the gift tax exemption was frozen, while the estate tax exemption rose. If one gifts to the children $1,000,000 in 2011 and then dies in 2020 and that $1,000,000 has grown to $2,000,000, then the benefit of the gift is removing the $1,000,000 appreciation, or increase in value from the taxable estate.

 

NOTE - the Dale Law Firm, PC has for the past few years anticipated these changes in the law for our clients.  Most trusts we have done or restated have incorporated disclaimer trust provisions. If you wish your estate plan reviewed, call us at 925-280-0172 for a formal review.