What you need to know

The recently enacted Tax Relief Act results in several beneficial changes to estate planning laws, including significantly increased exemptions for federal estate, gift and generation-skipping transfer taxes.

What you need to do

Families should consult with their wealth managers to determine how best to adjust their planning strategies.

Under the recently enacted 2010 Tax Relief Act, Congress made significant changes to the federal estate, gift and generation-skipping transfer (“GST”) tax laws for 2010, 2011 and 2012. These changes present new and important estate planning opportunities over the next two years.

Among the changes made, the new law:

  • reduces the top federal estate, gift and GST tax brackets to 35%;
  • increases the exemptions for the federal estate and GST taxes for 2010, 2011 and 2012 to $5 million per person (so a couple may leave up to $10 million to their family free of estate tax);
  • increases the federal gift tax exemption for 2011 and 2012 to $5 million per person (allowing a couple to give away up to $10 million free of gift or GST tax); and
  • introduces the concept of “portability” which (for couples where both spouses die before 2013) allows the estate of the second spouse to die to take advantage of any unused portion of the first spouse’s $5 million federal estate, but not GST, tax exemption.

While the 2010 Tax Relief Act makes significant changes to the federal tax laws, for Massachusetts residents, the state-level estate tax remains the same. The Massachusetts estate tax still provides for only a $1 million exemption, with graduated rates ranging from 3.8% to 16%.

The changes made by the 2010 Tax Relief Act expire at the end of 2012. Unless Congress extends them, on January 1, 2013 the exemption and rates will revert back to their 2000 amounts. This would mean $1 million federal estate, gift and GST tax exemptions and tax rates of up to 55%.

While it is hard to predict the future, its clear that the current law – and especially the ability to make large gifts in 2011 and 2012 without paying a federal gift or GST tax – presents important estate planning opportunities. In addition to outright gifts, you can use the increased gift and GST tax exemptions to establish Generation-Skipping Trusts for grandchildren, Family Limited Partnerships and other trusts or corporate entities that might lead to significant tax savings for you and your family. In addition, sustained low interest rates mean that Grantor Retained Annuity Trusts remain a very attractive estate planning vehicle.