2011 - What To Do?

The dust has settled on the 2010 eleventh hour Federal Tax Bill. The new features which are important to estate planners are:

(1) Increase of the individual Federal Estate Tax Exemption to $5.0 million per person.

(2) Re-combining the gift tax and estate tax exemption so that lifetime gifting becomes much more important.

(3) Introducing portability of the estate tax exemption for married couples.

These changes offer powerful estate planning opportunities and challenges.

Jumbo Exemption. The Federal Estate Tax Exemption for 2011 and 2012 is raised to $5.0 million per person or $10.0 for a married couple. The tax rate is reduced to 35% of the taxable estate in excess of the unused exemption.

Does this mean that married couples with less than $5.0 million of combined assets should forget about estate taxes? The answer is an emphatic "no." The principal reason is that in most cases tax planning is only one of the motivations for estate planning. Protection and management of family wealth for the future benefit of family members is still important.

What about married taxpayers with combined assets of more than $5.0 million? Certainly, estate planning and trusts take on a tax complexion.

Gifting Becomes Critical. For the first time ever, lifetime gifts take on huge importance in wealth preservation. Taxable gifts (those reported on Form 709 to the Internal Revenue Service), made to family members directly or in trust, take on a new importance for families. This is the first time that the lifetime gift tax exemption has exceeded $1.0 million per person. For wealthy taxpayers, this is a prime opportunity to make gifts in trust for family members, including charitable trusts. Charitable gifts and estate planning take on new importance because the value of property transferred to family members is so much larger. This subject will be dealt with in future newsletters.

A Note of Caution! Remember that property transferred by gift carries over the donor's cost basis for purposes of computing future capital gain. Thus, identification of property to be gifted is critical. High-cost-basis assets are definitely preferable, to minimize future potential capital gain taxes. Remember that capital gain rates are likely to increase in the future. Also, remember that property owned at death takes a step-up in cost basis to the date of death value.


Portability. The 2010 Tax Act introduces the concept of portability of estate tax exemptions between spouses. In a simple example of portability, assuming the husband dies in 2011 with a taxable estate of $3.5 million. No estate tax is due, without using a marital deduction. Morever, the surviving wife can elect to carry over the unused $1.5 million from the husband's estate to her taxable estate. However, in order to take advantage of this benefit, the surviving wife has to make sure that an estate tax return is filed for the husband, making the election to carry over or transfer the husband's unused estate tax exemption. The portability option is lost if a proper tax return is not filed for husband. (Even though no tax is due at husband's death.) It is still important to use a trust for wife, not an outright gift, in these circumstances.

Are A-B Trusts Obsolete? Many traditional trusts for married couples contain provisions for division of trust property at death into two separate trusts, Trust A and Trust B, or "Marital Trust" and "Family Trust." The alternative that we have been using the past few years is a trust for the surviving spouse alone, with the possibility of a "Q-TIP" election possible in the event that a marital deduction is needed.

In short, the traditional A-B Trusts formulas should be carefully reviewed to make sure that the interests of the surviving spouse are adequately protected. We have been warning in our seminars that there are a lot of out-of-date formulas and trust provisions out there. These formulas might have worked fine with an estate tax exemption of $675,000 or $1.0 million. These formulas may not be appropriate with the large $5.0 million exemption.

Are Sweetheart Estate Plans Now The Rule? For some married couples, a "Sweetheart" estate plan, with everything left to the surviving spouse may work just fine. However, usually there are family planning concerns that favor protection of family wealth with trusts. Trusts can help prevent improvident use and protect assets from both creditors and predators. There is no general rule. Every family's situation is unique and should be reviewed carefully when the question of estate planning updates arise. Moreover, if the estate tax exemption goes down in 2013, it is important to use the exemption of the first spouse to die with a trust.

Conclusion. The 2010 Tax Law presents many opportunities and some challenges. Remember that the new estate and gift tax provisions do not apply beyond December 31, 2012. Without action by Congress, the exemption drops back to $1.0 per person on January 1, 2013. Experience over the past year or so has taught us that we cannot depend on Congress to act in a timely fashion with respect to tax law changes. Most of us are aware that the country cannot keep spending with no regard for tax revenues. This means more changes on the horizon and the necessity for more frequent review of estate planning documents. If you have questions about your documents or need a review, please call Jim Modrall or Priscilla Hirt, at (231) 941-9660, or any of the other attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., James R. Modrall, III, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe, Nicole R. Graf, Priscilla V. Hirt at (231) 941-9660
BRANDT, FISHER, ALWARD & PEZZETTI, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional advice.