Many of you have read or heard about the new tax law that Congress passed and the President signed several weeks ago. After enormous uncertainty concerning the status of the estate, gift and generationskipping taxes as of January 1, 2011, now we know what the rules are. Here are highlights of the provisions having the greatest estate planning impact:
- The estate tax exemption, as well as the exemption from generation-skipping tax, has been increased to $5 million. Additionally, the gift tax exemption, which had been capped at $1 million beginning in 2004, has been increased to $5 million. Said another way, the gift tax now has been "re-unified" with the estate tax.
- The estate tax, gift tax and generation-skipping tax have only one rate - 35%.
- A provision has been added to the estate tax and gift tax law to make the portion of a first spouse’s estate tax exemption that is not fully used upon his or her death "portable", so that the unused portion may be added to the surviving spouse’s own gift and estate tax exemption, thereby increasing the amount that the surviving spouse may transfer, during life or at death, without paying tax.
- The gift tax, estate tax and generation-skipping tax exemptions will be indexed for inflation, beginning in 2012.
- The concept of "carryover basis", which briefly reappeared in 2010, has gone away again. As was the case in 2009 and prior years, beginning in 2011 the "cost basis" of an asset received from a decedent, for purposes of calculating capital gains tax, will be the value of such asset upon the decedentowner’s date of death. In other words, for purposes of determining an asset’s cost basis it no longer will be necessary to determine the original purchase price of that asset.
These changes to the estate tax, gift tax and generation-skipping tax law have a two-year life span; all changes are scheduled to expire on December 31, 2012. Whether Congress in fact will scale back any of these provisions remains to be seen.
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What does all of this mean? Here are several preliminary observations:
- For the vast majority of families, the federal estate tax is no longer a concern. However, many states - including New Jersey, New York, Massachusetts and Pennsylvania - have in place state-level estate or inheritance taxes that have not changed. For example, the New Jersey estate tax exemption is a relatively paltry $675,000 and an inheritance tax system also is in place. In New York and Massachusetts the estate tax exemption is $1 million. Pennsylvania continues to charge an inheritance tax.
- The increase in the gift and generation-skipping tax exemptions from $1 million to $5 million makes it possible to accomplish significant lifetime gift-giving, for those who can afford to do so. It is not clear whether these increased exemptions will continue after 2012, so the time frame for substantial gifts to children and grandchildren, for example, may be limited.
- Although there were rumors that the tax bill might contain limitations on popular estate planning strategies such as grantor retained annuity trusts ("gRATs") and valuation discounts for closely-held business interests, those limitations were not included in the final version of the tax bill. These planning strategies remain viable.
- going forward, there will be no need for most estate plans to focus on minimizing federal estate tax, because there will not be any for most families.
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This is only a brief summary of the new statute’s provisions. After months of uncertainty, it is a relief to know what the rules are. The new tax regime will have different effects on different estate plans, many of which use a formula to fund gifts to individuals or trusts. given the increased magnitude of the exemption, a plan’s funding formula could have a significantly different impact on the disposition of your assets.
The passage of the new tax law makes this an opportune time for you to review the intended disposition of your assets in light of both the new rules and your current financial and family situation.