Big changes are coming to the estate tax in 2011 with or without Congressional action. At the end of this year, the estate tax reform passed in 2001 is set to expire. Lawmakers still have not made up their minds what to do about estate tax reform.
Given this uncertainty, following are tips from Grant Thornton LLP to keep in mind for planning:
Current estate tax rules. For gift tax purposes, there is a maximum gift tax rate of 35 percent and an exemption of $1 million. There is no estate tax or generation-skipping transfer (GST) tax. Thus, if you die in 2010, your estate is not subject to estate tax. However, your estate will be subject to “modified carryover basis” rules that will have an impact on the gain your heirs will recognize when they eventually sell property from your estate. If you give property to someone who is a “skip person” (e.g., your grandchild or great-grandchild), you are not subject to GST tax, but you still will be subject to gift tax.
Estate tax rules in 2011. The estate tax and GST tax will be resurrected as they existed in 2000. Maximum gift, estate, and GST tax rates return to 55 percent with an exemption of $1 million (indexed for inflation in the case of GST tax). The basis of property your heirs receive from your estate will be the fair market value on the date of your death.
Congressional action. Congress has expressed intent to enact estate tax reform legislation before the expiration of the 2001 reform measures, but its members cannot agree on the extent of reform, which means they may very well do nothing. What if Congress does act? They may return to the gift, estate, and GST tax regimes that existed in 2009 with the possibility for a top rate somewhere between 35 and 45 percent, and an exemption amount between $3.5 million and $5 million (although the gift tax exemption may remain at $1 million). At the beginning of the year, Congress expressed intent to make any reform retroactive to January 1, 2010, but this now appears unlikely given their failure to get reform done quickly and the deaths of many taxpayers in 2010 who are now not subject to the estate tax. Congress also has expressed intent in allowing the estates of persons who die in 2010 to elect whether to apply the current 2010 law or to apply the law of a newly enacted estate tax regime. It is not as clear whether Congress might try to make any GST tax reform totally or partially retroactive.
Maximize gift tax exclusions. Regardless of any pending estate tax reform, the tried and true strategy of reducing your estate through annual gifting to your children and grandchildren (and possibly even great-grandchildren) remains a basic and powerful estate planning tool. Gifts of up to $13,000 per donee ($26,000 for married couples) generally are excluded from gift tax in 2010 and will be removed from your estate, with no limit on the number of donees. In addition, payments of tuition to an educational institution for the benefit of your children or grandchildren are excluded from gift tax.
Take advantage of gift tax exemption amount. Take advantage of your $1 million gift tax exemption by gifting property that has the potential to appreciate in value to your heirs now rather than at death. Regardless of how much that property appreciates after you give it away, only the value on the date you give it away is used to determine your estate tax when you die.
Consider making taxable gifts. The current gift tax rate is 35 percent, which is probably the lowest you will see in the foreseeable future regardless of any pending estate tax reform. So after you’ve taken advantage of your $1 million gift tax exemption, consider whether you should make additional taxable gifts. As compared to paying gift or estate tax at the probable future rates, paying tax now may save you a lot in the future.
Take advantage of depressed economic conditions and low interest rates. Taking advantage of low interest rates and depressed property values is a great estate tax minimization strategy. When both of these conditions exist, it is almost always beneficial to make transfers of property, even if you do incur gift tax. Remember that there also are many estate planning techniques that can further enhance this opportunity such as grantor retained annuity trusts, family limited partnerships, charitable lead trusts, and sales to family trusts.
Maximize gifts to grandchildren. In addition to taking advantage of the low gift tax rate, transfers directly to grandchildren (or great-grandchildren) will currently not be subject to GST tax this year. But keep in mind that, however unlikely, GST tax reform may include these transfers retroactively.
Consider making transfers from trusts that would have been subject to GST tax. Prior to 2010, some distributions from some trusts were subject to GST tax because these distributions were made to skip persons (e.g., a grandchild of the donor). These distributions were referred to as taxable distributions. Taxable distributions required the beneficiary who received the distribution to pay GST tax. Distributions to skip persons made this year currently are not subject to GST tax. Again, keep in mind that GST tax reform may include these transfers.
Be careful when making transfers to trusts. Given that it is almost certain there will be a GST tax in 2011 and beyond, careful consideration should be given before making transfers to trusts that may have GST tax consequences in the future (e.g., transfers to trusts in which grandchildren or remote heirs are current or potential beneficiaries). As there is no GST tax this year, and thus no GST exemption, there is no way to shield the trust from possible future GST tax consequences.
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