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Estate Planning |
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Estate Planning under the New Laws; ©2001 Starting in 2002 new estate and gift tax rules will be applicable to lifetime gifts and transfers taking effect as of a decedent's date of death. However, it must be remembered that these changes are effective until 2010 and the various changes and rate reductions, inclusive of the repeal of the estate tax, will terminate on January 1, 2011 unless specific action is taken to extend the new law. This creates certain short-term opportunities, but also creates much long-term uncertainty. 2010 Estate Tax Repeal In 2010 the estate tax is repealed. Between now and then the exclusion amount is gradually increased and the top estate tax rates are reduced. However, if new legislation is not adopted between now and 2011, the existing estate/gift tax law will be reinstated with the current tax rates and a $1,000,000 maximum exemption/exclusion amount. Year
Top Estate Tax Rate
Exemption/Exclusion Amount Gift Tax Remains While the estate tax is to be eliminated, the gift tax will remain, subject to a maximum lifetime exemption of $1,000,000 starting in 2002 and continuing thereafter. During the next 8 years, while the estate tax is gradually phased-out, the gift tax rates will be the same as the estate tax rates. Once the estate tax is repealed, the gift tax rate will be the maximum income tax rate, i.e. 35% in 2010. The annual exclusion for gifts up to $10,000 per done will remain in effect. No Step-up in Basis Currently, inherited property receives a "step-up in basis". This means a beneficiary receives inherited property with an adjusted basis equal to its fair market value at the time of the decedent's death (or 6 months later if the alternate valuation date is used). Starting in 2010, property inherited from a decedent will have a carry-over basis in the hands of the beneficiary, resulting in a built-in income tax liability for property that has appreciated in value. Under the new law only $1,300,000 in appreciation will be sheltered from the capital gains tax, with the potential for an additional $3,000,000 for property passing to a surviving spouse. Consequently, the potential income tax on property which does not get a step-up in basis can create significant complications for the beneficiaries. This means estate plans must consider not only whether estate taxes will be owed but also the income tax consequences of the sale of estate property. Review Existing Documents In light of the above changes to the estate/gift tax law it is important to review your existing estate planning documents to make sure they are appropriate under the circumstances. As an example, many wills/trusts provide for a "credit shelter" or "by-pass" trust which is to be funded with the maximum exclusion amount. Under old law that amount would not exceed $1,000,000.00. Under the new law this amount could be $3,500,000 in 2009 and unlimited if the estate tax is eliminated. If the trust provides for the maximum exclusion amount to go surviving children and the balance to the surviving spouse, the increased exclusion amount could result in the surviving spouse receiving nothing or much less than was intended. Conversely, children and other heirs may be receiving much more than was ever anticipated. Potential Conflicts Between Heirs The repeal of the "step-up" in basis and the $1,300,000.00 cap on the amount of increased basis allocable to inherited assets (assuming the assets do not pass to the surviving spouse) can cause problems. The allocation of the step-up in basis is made by the executor of the estate. In the past the executor did not have to make such an election and specific instructions for making such an allocation are not found in existing wills/trusts. In light of the differing tax consequences that can arise out of the allocation of basis, it may be prudent to consider including specific instructions so that there is some equality/fairness in the allocation of basis among various assets and the beneficiaries that receive those assets. Lifetime Gifts and Trusts In the event that the repeal of the estate tax is permanent, there will still be gift tax issues. Only the first $1,000,000 in lifetime gifts to non-spouses will be exempt from the gift tax. Gifts in excess of $1,000,000 will be taxed at the highest marginal income tax rate, i.e. 35% in 2010. Until the repeal of the estate tax, the gift tax rates will match the existing estate tax rates. In light of the potential repeal of the estate tax, any planned gifting of assets should be structured so as to avoid payment of gift tax. Consequently, gifting of fractional interests and the use of various types of trusts and family partnerships will become even more significant for inter-generational planning. With larger sums passing to younger generations, trusts will be more important. Consideration should be given to whether younger beneficiaries are prepared to manage the assets they will inherit. In many cases it may be more appropriate to have those assets held in a trust and managed according to criteria established by the older generation. Incentive trusts and dynasty trusts are particularly suited to accomplishing these purposes. Such trusts can contain instructions to the trustee for the investment and disbursement of trusts assets, condition distributions to beneficiaries on the attainment of stated goals and objectives, and restrict access to trust principal so as to protect trust beneficiaries from the effects of divorce and bad business decisions. You should carefully review your existing Wills and Trusts to make sure they are appropriate in light of the new legislation. Keep in mind that the estate tax is repealed only for the single year of 2010. Additionally, with the loss of the step-up in basis, inherited assets now carry potential income tax liability that can create tax problems for beneficiaries as severe as the payment of estate tax. |
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