FEATURE ARTICLE
Estate Planning Update

By: Sanford J. Schlesinger, Esq., and Martin R. Goodman, Esq., Schlesinger Gannon & Lazetera, LLP

(Editor's Note: If you were fortunate enough to be in the audience at PPGGNY's January 19 Luncheon, you heard Mr. Schlesinger discuss technical tax issues affecting estate planning. In view of the importance and timeliness of the topic we are sharing some highlights from his presentation and strongly suggest that you read the complete article. Also available are Mr. Schlesinger's original supporting handouts.)

Estate Taxes:
For the estates of persons dying in 2010, the Act imposes an estate tax on such estates, grants an estate tax exemption of $5,000,000 (indexed for inflation from 2010, but starting in 2012), applies a maximum estate tax rate of 35% and provides for a full step-up in basis for income tax purposes with respect to the assets acquired from the decedent. However, the Act also permits the estate of a person who dies in 2010 to instead elect to not be subject to any federal estate tax, but to be subject to the modified carryover basis regime that existed under the prior law. Under this modified carryover basis regime, for income tax purposes the income tax cost basis of assets that are inherited will be the lesser of the decedent's income tax cost basis of those assets, or the value of those assets at the date of the decedent's death, subject to certain limited exceptions.

Gift Taxes:
The gift tax exemption and the maximum gift tax rate for gifts made in 2010 remain at $1,000,000 and 35% respectively, as under prior law. However, for gifts made after 2010, the gift tax exemption will be $5,000,000 (also indexed for inflation, as described above) and the maximum gift tax rate will remain at 35%.

Generation-Skipping Transfer Taxes:
The Act creates an exemption of $5,000,000 (indexed for inflation from 2010 but commencing in 2012) for GST tax purposes, commencing in 2010; provides that the GST tax rate for generation-skipping transfers occurring in 2010 is zero; and provides that the maximum tax rate for GST tax purposes is 35% for generation-skipping transfers that occur after 2010.

Portability Provisions:
The Act also contains "portability" provisions that allow a surviving spouse to use the unused portion of the estate tax exemption of the last deceased spouse of the surviving spouse. The surviving spouse can use such unused portion for both gift tax and estate tax purposes, but not for generation-skipping transfer tax purposes. It is important to note that these provisions apply only if the death of the first spouse to die occurs after 2010. Thus, both spouses must die after 2010 and before 2013 for these provisions to apply.

Sunset Provision:
The Act contains a "sunset" provision, which in the absence of further legislation will cause these estate tax, gift tax and generation-skipping transfer tax changes to expire after December 31, 2012. Thus, absent further legislation, in 2013 the estate tax, gift tax and generation-skipping transfer tax exemptions will revert to $1,000,000 (with the generation-skipping transfer tax exemption, but not the estate tax or gift tax exemption, indexed for inflation since 1998), and the maximum tax rate for all such purposes will be 55%.

Omitted Provisions:
The Act does not contain any provisions requiring a minimum term for grantor retained annuity trusts ("GRATs"). Thus, short term GRATs continue to be a viable estate planning tool. In addition, the Act does not contain any provisions restricting valuation discounts for transfer tax purposes. As a result, valuation discounts for family limited partnerships continue to apply for transfer tax purposes, as in the past.

Federal Income Taxes:
The Act extends many of the Bush-era income tax cuts through 2012. Thus, for two more years the maximum income tax rate on ordinary income will remain at 35%, and the maximum income tax rate on long term capital gains and qualified dividends will remain at 15%.

In addition, the Act extends for 2010 and 2011 the ability of a person who is at least 70½ years old to make a direct contribution to charity of up to $100,000 from the person's Individual Retirement Account, without the contribution being included in the person's income. Moreover, the Act permits a person to make such a contribution in January 2011 and to treat the contribution as having been made on December 31, 2010.

© Sanford J. Schlesinger, Esq. and Martin R. Goodman, Esq. All rights reserved 2011.

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