Jackson & Campbell, P.C., D.C. law firm representing regional and national clients in dispute resolutions, including litigation, arbitration and mediation.

The Estate and Gift Tax Law of 2011, 2012 and Beyond

By: Stephan C. Nicholas, Nancy O. Kuhn and Steven A. Sigsbury

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010¹ (the "2010 Act"), which substantially modifies federal income, estate, gift and generation-skipping transfer (“GST”) taxes for the years 2010 through 2012. We have condensed the relevant provisions of the 2010 Act that will affect the estate planning of our clients, as follows:

Estate and Gift Tax Changes

For 2011 and 2012, the federal gift and estate tax exemptions have been increased to $5,000,000. Each taxpayer may apply part or all of the $5,000,000 exemption toward lifetime gifts made in 2011 and 2012, leaving any unused amount available at death as an estate tax exemption;
The federal estate tax exemption is “portable” between spouses. This allows a surviving spouse to use the remaining and unused portion of his or her deceased spouse's estate tax exemption, if an election is made on the deceased spouse's estate tax return (Form 706).
The federal gift and estate tax rate is set at a flat 35% for 2011 and 2012; and
As with prior law, the annual gift tax exclusion remains at $13,000 for 2011 and 2012 (with the possibility of inflation adjustments in future years).

GST Tax Changes

For 2011 and 2012 transfers, the GST tax rate is set at 35%; and
The GST tax exemption amount is increased to $5,000,000, without portability.

Personal Income Tax Changes Which Impact Estate Planning

The IRA charitable rollover technique, which permits individuals who are 70½ or older to direct up to $100,000 of their required minimum distributions (“RMDs”) from their IRAs to §501(c)(3) charitable organizations without it being counted as taxable income, was renewed for 2010 and 2011.

Recent legislation, the Public Good IRA Rollover Act of 2011 has been proposed to make permanent and expand the IRA charitable rollover, lifting the $100,000 charitable gift limit and allowing for certain giving, e.g., to a charitable remainder trust, to begin as early as age 59 ½. The legislation has so far attracted 11 co-sponsors and is currently pending before the Senate Finance Committee.

These changes, however, are not permanent, and will sunset at the end of 2012. Unless Congress acts before the close of 2012, the estate, gift and GST tax provisions above will be "rolled back" to the rates and exclusions that existed in 2001. We have included a chart detailing the rates and exemptions for 2011, 2012 and 2013 and thereafter.

Additionally, apart from the significant changes summarized above, it is important to note that the 2010 Act did nothing to change the conventional "valuation" and "intra-family transfer" planning that many advanced estate plans incorporate. To the extent your estate plan combines planning tools such as family limited partnerships (FLPs), qualified personal residence trusts (QPRTs), charitable remainder and charitable lead trusts (CRATs and CRUTs), grantor retained annuity trusts (GRATs), and irrevocable life insurance trusts (ILITs) those elements are still permitted. However, in light of the above, we recommend a review of such components to ensure that your overall plan is set up and funded correctly.

Please also note that the 2010 Act did not create a 10-year minimum term for grantor retained annuity trusts (GRATs), despite several proposals to do so. 2-year GRATs are still permitted and continue to be an attractive estate planning option in light of the current favorable GRAT rules and low interest rates. The charitable version of a GRAT - the charitable lead annuity trust (CLAT, identical to the GRAT except that the annuity passes to a charity instead of to the donor) also remains appealing given the current low interest rates.

Estate Planning Review Recommended

Due to the changes to the estate, gift, and GST tax laws summarized above, we recommend that your estate plan be reviewed to assess the potential implications of the new laws and to determine whether any changes should be made.

Specifically, we recommend that you address:

Whether, as a result of the increased Federal estate tax applicable exclusion amount, you would like to adjust the amount passing on your death to your children or your exemption trust for your spouse and/or children.

For example, most estate plans that have setup "bypass" or "marital trusts" contain formulas that allocate estate assets to one or more trusts in an amount equal to the Federal estate tax applicable exclusion amount for a surviving spouse and children. However, given the increased Federal applicable exclusion amount, a state estate tax will be generated in states that have an estate tax but have not similarly raised their applicable exclusion amount (e.g., D.C. and Maryland, both currently have a $1,000,000 exclusion amount; Virginia has no state estate tax.). Retaining the formula may be appropriate but we recommend that the issue be discussed.

Whether your estate plan is appropriately structured to take advantage of the increased estate tax applicable exclusion amount and the GST exemption to best provide for your children, grandchildren and more remote descendants on your death.

Specifically, to take advantage of the maximum GST exemption for married spouses or partners, it is important to analyze whether assets are allocated properly between them.

The implications of “portability” of the estate tax applicable exclusion amount.

Additional Estate Planning Opportunities

Because the recent changes to the estate, gift and GST tax law are only in effect until December 31, 2012, we would recommend that you discuss with us ways in which you can take advantage of various estate planning opportunities, including:

Planning for descendants through the use of lifetime gifting and trusts, to take advantage of the increased $5,000,000 exemption for gift and GST taxes;
Taking advantage of current interest rates through the use of a grantor retained annuity trust (GRAT) or a charitable lead annuity trust (CLAT) before further legislative proposals potentially increase the minimum annuity term;
Leveraging the increased exemption amounts through sales of assets to trusts for descendants or others; and
Charitable planning in the form of lifetime gifting, trust, and the use of the IRA-rollover technique.

If you have questions regarding these estate, gift, and GST tax changes, or to schedule a review of your estate plan, please contact Nancy O. Kuhn, Chair of the Tax Group, at nkuhn@jackscamp.com, or Stefan C. Nicholas, Chair of the Trusts & Estates Group, at snicholas@jackscamp.com.

The Estate, Gift and GST tax rates and exemptions for 2011, 2012 and 2013 forward:

	2011	2012	2013 and beyond
Estate Tax Rate	35%	35%	55%
Estate Tax Exemption	$ 5,000,000	$ 5,000,000 (increased by a cost of living adjustment, based on 2010)	$ 1,000,000
Gift Tax Rate	35%	35%	55%
Gift Tax Exemption	$ 5,000,000	$ 5,000,000 (increased by a cost of living adjustment, based on 2010)	$ 1,000,000
GST Tax Rate	35%	35%	55%
GST Tax Exemption	$ 5,000,000	$ 5,000,000 (increased by a cost of living adjustment, based on 2010)	$ 1,000,000 (increased by a cost of living adjustment, based on 1997)

¹Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub.L. 111-312, 24 Stat. 3296 (December 17, 2010).

IRS Circular 230 Notice: To ensure compliance with requirements under Treasury Department Circular 230, we inform you that the contents of this publication are not intended or written to be used, and may not be used, for the purpose of (i) avoiding U.S. federal tax penalties or (ii) promoting, marketing or recommending to another party any matter addressed herein. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.