New 2011 Estate Tax Law Summary

Here's a good summary of the new laws concerning the estate tax and planning opportunities over the next couple of years.


By Julius Giarmarco December 21, 2010

On December 17, 2010, President Obama signed into law H.R. 4853, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This two-year tax extenders bill makes significant changes to the gift, estate and generation skipping transfer tax (GST).

Exemption and rate

For 2011 and 2012, H.R. 4853 sets the gift, estate and GST exemption at $5 million per person and $10 million per couple, with a tax rate of 35 percent. Thus, the estate, gift and GST exemptions are unified again for two years. The $5 million exemption amount is indexed for inflation beginning in 2012. But remember that these changes are for only two years. On January 1, 2013, unless Congress acts again, the gift, estate and GST tax exemption will be $1 million (adjusted for inflation) with a top tax rate of 55 percent.

Optional retroactivity for 2010 decedents

Estates of persons who died in 2010 will have the option of electing no estate tax with a modified carryover basis — i.e., a limited step-up in basis of $1.3 million, plus $3 million for property passing to a spouse — or a $5 million exemption with a complete step-up in basis. Any election would be revocable only with the consent of the IRS.

Gifts and generation skipping transfers

For 2010, the gift tax exemption remains at $1 million with a tax rate of 35 percent, and the GST exemption is $5 million with a 0 percent GST tax rate. For 2011 and 2012, the gift and GST tax exemption is $5 million per person and $10 million per couple, with a top rate of 35 percent. Since it's possible that in 2013, the estate, gift and GST exemptions might drop to $1 million (as adjusted for inflation) with a top rate of 55 percent, persons with large estates should consider using their $5 million gift and GST tax exemptions in 2011 or 2012.

H.R. 4853 clarifies that direct skips to trusts for grandchildren in 2010 will not result in the GST tax applying when distributions are made from the trust to the grandchild in later years. Therefore, it is possible (before year end) for a grandparent to transfer significant funds in trust for grandchildren, pay only a 35 percent gift tax and defer any estate tax until the grandchild's death. In any other year, the grandparent would have to pay GST tax of 35 percent in addition to the 35 percent gift tax. On the gift tax return reporting the 2010 transfer, the grandparent must opt out of the automatic GST allocation rules.

1) the deceased spouse's unused exemption is not indexed for inflation;
2) the unused exemption from the first deceased spouse will be lost if the surviving spouse remarries and survives his/her next spouse;
3) the growth in the assets in the credit shelter trust are removed from the surviving spouse's estate;
4) there is no portability of the GST exemption; and
5) the credit shelter trust allows the deceased spouse to make certain that the assets in the credit shelter trust are managed and distributed according to his/her wishes (and not those of the surviving spouse).

Portability of estate tax exemptions between spouses

For persons dying in 2011 or 2012, the executor of the estate may transfer any unused estate tax exemption to a surviving spouse — on a timely filed estate tax return. However, to prohibit "serial" marriages, only the most recent deceased spouse's unused exemption may be transferred by the surviving spouse.

Despite the relative simplicity of portability, there are several reasons for still using credit shelter trusts at the first spouse's death, including:

1) the deceased spouse's unused exemption is not indexed for inflation;
2) the unused exemption from the first deceased spouse will be lost if the surviving spouse remarries and survives his/her next spouse;
3) the growth in the assets in the credit shelter trust are removed from the surviving spouse's estate;
4) there is no portability of the GST exemption; and
5) the credit shelter trust allows the deceased spouse to make certain that the assets in the credit shelter trust are managed and distributed according to his/her wishes (and not those of the surviving spouse).

Planning opportunities

The ability to gift $5 million — $10 million for a married couple — without having to pay a gift tax will allow high-net-worth individuals to put a huge dent in their estate tax bill. For example, a gift of $10 million by a married grantor to an intentionally defective irrevocable trust (IDIT) will permit a sale of $90 million dollars of assets to the IDIT at current historically low interest rates. Further estate tax reduction occurs because the grantor is now paying income taxes on the income generated by the entire $100 million in the IDIT.

Moreover, if the assets gifted and sold to the IDIT can be discounted — for lack of control and lack of marketability — the value that can be transferred via the IDIT is further expanded. Finally, further leverage of the gift and GST tax exemption can be accomplished by having the IDIT use a portion of its cash flow to purchase life insurance on the life of the grantor or the joint lives of the grantor and his/her spouse.

With every new tax law comes challenges and opportunities. The 2010 Tax Act offers plenty of both.

Paula Straub

Looks Like We Are Getting A Reprieve

Looks like we will get a reprieve from capital gains tax increases for the next couple of years.

Why this couldn't have been decided months ago I have no idea. Makes no sense to raise taxes until we get this economy back on track.

Here are some of the highlights- but nothing has been passed just yet. I believe it will happen very soon.

Individual tax rates: The agreement would extend the Bush-era tax rates for two years for all taxpayers. Current rates would remain in place, with a top rate of 35%.

Capital gains: Current rates would be extended, and the top rate on long-term capital gains would remain at its historic low of 15% for two years. The rate applies to gains on assets held longer than a year.

Dividends: Current rates would be extended, and the top rate for qualified dividends—those on most stocks held longer than two months—would remain 15% for two years.
Payroll tax: The agreement calls for a two-percentage-point cut in the employee's portion of payroll (FICA) taxes, just for 2011. The change would make the tax 4.2% instead of 6.2% on the first $106,800 of wages per worker, according to the nonpartisan Tax Policy Center. No phase-in or phase-out or other limit was specified by the White House document, so the maximum a working couple could pocket is $4,272—$2,136 per individual wage-earner.

Alternative minimum tax: A two-year "patch," for 2010 and 2011, would keep the AMT exemption at or near current levels. Without the patch, 21 million additional taxpayers would owe AMT for 2010.

Estate and gift tax: No language on the estate or gift tax appeared in the document released by the White House, but a source familiar with the framework said it includes an estate-tax provision for 2011 and 2012 that has a top rate of 35% and an exemption of $5 million per individual.

Stay tuned for more info over the next week or two.

Paula Straub
760-917-0858
savegainstax@gmail.com

The IRS Giveth, and the IRS Taketh Away

If you haven’t noticed a pattern yet, when tax law changes to benefit one segment of the population (resulting in a loss of revenue to the IRS), there is usually some other change that reduces benefits to a different population segment, thus making up for the former loss.

Such is exactly what will happen if pending legislation passes into law.

HR 3648, or the Mortgage Cancellation Tax Relief Act, passed the House of Representatives Oct. 4, 2007 and is up for consideration in the Senate. If the bill becomes law, its tighter restrictions may require a new strategy for some investors.

Here is the gist in laymen’s terms of what this might mean to the average investor.

If you are in danger of foreclosure on your existing mortgage, a buyer may make a deal with your lender to purchase your home for less than what you owe. You are “forgiven” the difference from the lender, but under current tax law you must declare this forgiven amount as income on your tax return and pay income tax on money you don’t have. If you are already having trouble making mortgage payments, you often have trouble coming up with this extra tax payment and you are back to square one.

HR 3648 would exempt you from having to declare this as income in this situation. That’s the good news, but that’s a lot of money the IRS would be losing.

So, in order to save those with mortgage issues, the proposal is to tighten the rules for taking some personal exclusions on primary residences. Currently, if you own and live in your home for at least 2 of the last 5 years, you are allowed a personal exclusion of 250K if single and 500K if married filing jointly for capital gain when you sell.

What patient and savvy planners have been doing is selling their primary residences, taking the exclusion and moving into their appreciated second home or investment property for 2 years and then selling it and taking another exclusion to once again avoid capital gains tax.

What HR 3648 will do is limit the amount of exclusion available to you to the gain accrued only during the time you reside in that second property. So, if the property had increased in value by 300K prior to you moving in, then another 100K in the 2 years you resided in it, your exclusion would be limited to 100K when you sold and not the currently allowed 400K total gain (if married).

As with any tax law, if you are in neither of these situations you probably could care less. If you fall into the second category you will need a “plan B” to minimize your capital gains. Just be aware that laws constantly change and what is true today may be obsolete tomorrow. It’s a full time job just keeping up!

Paula Straub
www.savegainstax.com
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html

Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php