“Well everyone, the decision we have all been waiting for is FINALLY HERE!
As estate tax planning attorneys, we have been waiting, and waiting, and
waiting to get an answer as to what has happened to our estate tax laws. I
have received many phone calls and questions from clients wanting to know
what to do and how to plan so their legacies do not get desimated by
unnecessary estate tax bills. This week, our government created clarity for
all of us and signed a new estate tax law that is retroactive for 2010 and
extends through 2013. Granted, it is only a patch, for a limited period of
time, but at least we have the ball rolling now. Bottom line, it has never
been a better time to get your estate plan in action!
Congress has passed and President Obama has signed into law the deal
extending the Bush tax cuts that he struck with Congressional Republicans.
The legislation restores the estate tax for two years at a 35 percent tax
rate, with estates up to $5 million exempt from paying any tax ($10 million
for couples). If Congress does not change the law in the interim, in 2013
the estate tax will revert to what it was scheduled to be in 2011 — a 55
percent rate and a $1 million exemption. The $801 billion tax-cut bill makes
several other significant changes to wealth transfer taxes:
- The new $5 million estate tax exemption and 35 percent rate are retroactive
to January 1, 2010. The heirs of those dying in 2010 will have a choice
between applying the new rules or electing to be covered under the rules
that have applied in 2010 — no estate tax but only a limited step-up in the
cost basis of inherited assets. This will benefit the heirs of tens of
thousands who died in 2010 with relatively modest estates and who would have
been subject to capital gains tax on inherited assets above a certain
threshold. - The law makes the estate tax exemption “portable” between spouses. This
means that if the first spouse to die does not use all of his or her $5
million exemption, the estate of the surviving spouse could use it. - The law unifies the estate, gift and generation-skipping transfer tax
exemptions at $5 million. (For 2010 there is no generation-skipping tax,
while the gift tax exemption has been $1 million for a number of years.) A
35 percent tax rate will apply to gifts or transfers over the $5 million
threshold. (There is no change in the $13,000 annual exclusion amount for
gifts.) These high exemption levels mean that “[t]he rich will have a
two-year window in 2011 and 2012 to protect huge amounts of their estates
from taxation for generations,” wrote estates attorney Kevin Staker on his
Estate Tax News Blog.
But that window is open even wider than was previously assumed because of an
additional loophole for the wealthy in the new law. Although taxpayers have
until December 31, 2010, to transfer funds outright to grandchildren and
avoid the generation-skipping tax, there’s the risk that the grandkids will
squander the sudden influx of cash. As Forbes blogger Janet Novak explains
in a recent post, “the money doesn’t (as most planners had believed) have to
be distributed outright to the grandkids to qualify for the 0% rate.
Instead, according to the fine print in the tax deal, it can be put in a
trust for them, [noted estate planning lawyer Jonathan] Blattmachr says.
That means, he explains, that money can be taken from an existing
multigenerational trust, declared subject to the 2010 GST tax, and deposited
in a new trust for grandkids’ benefit, with the GST tax now pre-paid at a 0%
rate.” Novak says Blattmachr has been telling his estate planning attorney
peers, “Cancel your ski trip or trip to Hawaii. This is a once-in-a-lifetime
opportunity.”
The generous estate tax provisions were the main sticking point for
progressive Democrats. A vote in the House on an amendment to increase the
estate tax, including lowering the exemption to $3.5 million, was defeated
by a vote of 233 to 194. After some minor changes to the bill were made, it
passed the House by a 277 to 148 margin, after having been approved
overwhelmingly by the Senate 81 to 19.
The site Politico quotes one senior House Republican aide as saying, “I’m
trying to remember something that we passed under Bush that was this good.”
