Congress, in December, enacted important tax legislation applicable for 2011 and 2012. Although much of the focus was on income tax changes, there were very significant changes affecting the wealth transfer planning of most clients. The most noteworthy changes are as follows:

  1. Estate, gift and generation-skipping transfer (“GST”) tax exemptions have all increased to $5 million.
  2. “Portability” of estate tax exemptions and gift tax (but not generation- skipping tax) between spouses has been enacted, with certain requirements.
  3. Maximum estate, gift, and GST tax rates have all been reduced to 35%.

As indicated above, these changes are only applicable for two years, and, absent Congressional action, exemptions and tax rates will revert to their much less favorable levels in effect prior to the 2001 Tax Bill. Nobody knows the exact future of the current tax provisions, but they provide significant opportunities, and planning challenges, which must be addressed.

Among the many issues, and opportunities, presented are the following:

  • Major opportunities for large gift making, including generation skipping gifts.
  • GRATs, which everyone has presumed would be restricted, are still desirable and effective, at least for the immediate present.
  • Formula clauses must be examined to make sure that bequests, which were drafted when the exemption amounts were much lower, are still appropriate under current exemption amounts.
  • Asset titling and division of assets between spouses is critical and should be reviewed in light of the changes; portability is certainly not a “cure all.”
  • Leveraged gifts, including gifts of family businesses assets, are extremely important and attractive.
  • Qualified Personal Residence Trusts are attractive given high exemptions and reduced asset values.

IRS Circular 230 Notice:

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.