By Tim Mezhlumov, director, advanced markets, 1st Global
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (The Tax Relief Act, or TRA) introduced a number of changes in the area of federal gift, estate, and generation-skipping transfer taxes among other items. These changes can have a significant impact on certain high-net-worth families. At the same time, they provide a great opportunity for advisors to discuss with clients their estate plans and help close the gaps where needed.
Summary of 2011-2012 FET, Gift, and GST Tax Changes
The Tax Relief Act:
- Established a top 35 percent federal estate tax (FET) and gift tax rate and $5 million exclusion amount;
- Allows for portability of FET and gift exclusion amounts between spouses after December 31, 2010;
- Established a top 35 percent generation-skipping transfer (GST) tax rate and $5 million exclusion amount for transfers made after 2010 (portability provisions do not apply to GST); and
- Extended the state death tax deduction created by EGTRRA through 2012.
The newly enacted portability provision is perhaps the most interesting aspect of the TRA. This new system is rife with planning possibilities and pitfalls for the unwary—and with portability comes new terminology.
- Basic Exclusion Amount: the basic exclusion amount is $5 million.
- Applicable Exclusion Amount: Beginning January 1, 2011, the applicable exclusion amount is the sum of the basic exclusion amount and DSUEA (explained below). (Prior to January 1, 2011, the applicable exclusion amount was $5 million.)
- Deceased Spouse’s Unused Exclusion Amount (DSUEA): the sum of:
- 1. The unused basic exclusion amount of the deceased spouse, plus
- 2. Any DSUEA that the deceased spouse had as a result of a previous marriage
The following example may be helpful:
John and Mary are married. John was previously married to Tracy. When Tracy died, she had only $1 million in her estate, and the remaining $4 million of her basic exclusion amount (DSUEA) was transferred to John. John’s total exemption amount is $9 million ($5 million is his basic exclusion amount plus he received additional $4 million DSUEA as a result of Tracy’s death).
If John dies in 2011 with $4 million in his estate and leaves the remaining $5 million to Mary, then Mary will have $10 million total exemption amount available to her ($5 million is her basic exclusion amount plus $5 million DSUEA that she received from John).
The portability provision encourages filing of FET return for all married individuals who die in 2011 and 2012, even if the couple has no significant assets. A few reasons in favor of filing come to mind. It is possible that the surviving spouse will get remarried to a wealthy person and the unused exclusion will be needed. In addition, the exclusion has economic value. A single individual with a very large estate may see a financial benefit in marrying someone with little or no assets and two available exclusions. Or as one estate planning attorney put it, “Matchmaker, matchmaker, make me a match.” Finally, while this is one is a stretch, it is also possible that the surviving spouse will win the lottery and DSUEA will be needed. If the FET tax return is not filed, the DSUEA may be permanently lost.
Why It Is Still Important to Plan
Some clients may feel that because of the increased FET, gift tax, and GST tax exclusion amounts, there is no longer a need to plan or they can at least postpone planning. This notion is simply wrong for a number of reasons listed below. Everyone, not just the very wealthy, should have an estate plan. It is up to the advisor to proactively educate these clients about certain decisions that some of them will need to be make in 2011 and 2012. Postponing making these decisions can ultimately result in higher estate tax liability and, in turn, a smaller estate passing to heirs. Here are some of the reasons why planning is needed:
- The tax patch is only for two years;
- There is no portability of GST exclusions;
- Portability may go away altogether after 2012;
- Future appreciation is removed from the estate, when property is gifted to an irrevocable trust or directly to heirs;
- DSUEA is not indexed for inflation;
- Surviving spouses who plan to remarry will have to determine the impact of remarriage on the available DSUEA;
- Ability to restrict transfers by surviving spouse;
- Trusts can provide privacy protection and asset protection;
- Equitable disposition of assets among beneficiaries;
- Marital planning (e.g., children from a prior marriage);
- Asset and property management for incapable beneficiaries;
- Elder-care arrangements; and
- Special needs.
So, What Is Your Action Plan?
“Opportunities are never lost; someone will take the one you miss.”
This saying could not be truer in our business. If you are not reaching out to your clients with an offer to review their estate plans, there is a really good chance that other advisors will. So, consider the following action steps to help your clients and move your practice in the direction of working with high(er)-net-worth clientele and getting quality referrals:
- Create a flyer to be added to outgoing client correspondence with a summary of recent tax law changes and an offer to meet for free.
- Add a line to your e-mail signature inviting clients to contact you with questions.
- Update your voicemail and include a call to action (i.e., scheduling an appointment with you).
- If your firm utilizes an on-hold recording, make sure that it mentions recent changes in the law and includes a call to action.
- Author an article to be published. Be sure that it is not too technical, as the goal is not to educate but to provoke action, such as a phone call to your firm. E-mail the article to clients and prospects and post it on your firm’s Web site. Send the article to editors of your local publications.
- Host a seminar to help clients and prospects understand the opportunities created by the Tax Relief Act. You can also have the seminar recorded and post the video on your firm’s Web site.
As you meet with clients, it is imperative to keep in mind that the most important thing you can do is to provide them with specific action steps and recommend that they act sooner rather than later.
To learn more about the opportunities created by the 2011-2012 Federal Estate Tax Patch and how estate planning can be integrated into your practice, contact 1st Global at (800) 959-8461 or [email protected].