The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act) was enacted on December 17, 2010. It makes significant changes to the estate, gift, and generation-skipping transfer (GST) tax laws for 2011 and 2012 and creates important wealth-transfer opportunities in the short term. Unless Congress acts in the next two years, these new rules will disappear in 2013, and the estate, gift, and GST tax laws will return to 2001 levels, with higher rates and lower exemptions.

Important Changes for 2011 and 2012

  • The estate, gift, and GST tax exemptions have been increased to $5 million.
  • The top tax rate has decreased to 35 percent.
  • The 2010 Tax Act provides for “portability” of the estate tax exemption—that is, a decedent’s unused estate tax exemption may be transferred to his or her surviving spouse.


Chart of Exemptions and Rates

 Windows of Opportunity

*To be adjusted for inflation beginning January 1, 2012.
**To be adjusted for inflation beginning January 1, 2013.

Check Current Estate Plan

Your current estate plan should be reviewed in light of the new law. For example: (1) If your plan utilizes a “formula” gift— that is, if the size of a gift is determined by reference to the estate or GST tax exemptions—or caps the amount passing to an exempt GST trust, you should contact us promptly. The new tax laws may distort your wishes. (2) Under prior law, it could be problematic for a married couple to hold a high portion of their assets jointly. With the addition of “portability” of the estate tax exemption, joint property now is less of a tax issue for some, at least in the short term. There may, however, still be important reasons to hold property in separate names.

Planning Opportunities … At Least for Two Years

  • With the increased gift tax exemption, an individual who has previously given the pre-2011 maximum of $1 million ($2 million for a couple) will be able to give, outright or in trust, an additional $4 million ($8 million per couple) without incurring gift tax.

  • The increased GST tax exemption will provide opportunities to transfer more assets to grandchildren or more remote descendants, outright or in trust.

Other Opportunities

  • Grantor Retained Annuity Trusts. Although some commentators expected new estate tax legislation to include provisions reducing the tax benefits of grantor retained annuity trusts (GRATs), the 2010 Tax Act does not do so. Accordingly, the window of opportunity for GRATs remains open. If you are contemplating creating a new GRAT, you should contact us as soon as possible.

  • Valuation Discounts. Likewise, although there has been speculation regarding proposed restrictions to the rules governing valuation of intra-family transfers, the 2010 Tax Act does not contain any restriction on valuation discounts. With many businesses and real estate valuations still low, this may present an additional opportunity to transfer assets on a tax-favored basis.

Questions?

Ballard Spahr’s Family Wealth Management attorneys are available to answer any questions you may have and to assist you in working through the new tax laws. Please do not hesitate to call or e-mail any one of us.


IRS “Circular 230” Disclaimer Note: Under certain circumstances, a taxpayer may avoid certain penalties under the Internal Revenue Code by relying on a formal opinion of counsel that meets specific IRS regulations. Any tax advice in this communication does not constitute a formal opinion that meets the requirements of those regulations. Accordingly, the IRS regulations require us to advise you that any tax advice in this communication is not intended or written to be used, and cannot be used by you, to avoid penalties that the IRS might attempt to impose on you.


Copyright © 2011 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.