2011-2012: The Time to Plan

Congress has given those who plan estates a wonderful 2 year window before the possible return of the estate tax in 2013. The 2010 Tax Act kicked the can of Bush tax cuts down the road for two years. In addition, Congress increased the size of the exemptions from tax. The new limits are set to expire on December 31, 2012. But, in the meantime, here are the current limits:

1. Gift Tax Exemption: Individuals can now make lifetime gifts up to a $5M and exclude the transfer from tax by filing a Federal Gift Tax return allocating one's lifetime gift tax exemption.
2. Generation Skipping Transfer ("GST") Tax Exemption: Individuals can now set up trusts for younger beneficiaries and use a $5M GST lifetime exemption. This is a "use it" or "lose it" exclusion. Once a person dies, this exemption disappears.
3. Annual Exclusion Gifts: In addition to the use of one's lifetime exemptions, an individual can also make annual exclusion gifts of up to $13,000 per year per donee without any adverse tax consequences.
4. Estate Tax Exemptions: An individual can die in the next 2 years and not pay any Federal tax on estates of less than $5M. In addition, for spouses dying in 2011 and 2012 it will now be important for the personal representative of a deceased person's estate to file a gift tax return passing along a deceased spouse's Unused Spousal Exclusion Amount to one's spouse. Effectively, the surviving spouse could then have up to $10M worth of estate tax exemption. However, the GST tax exemption cannot be transferred in this manner.

This means that families with wealth who wish to plan ahead can do some extraordinary things to benefit future generations. The use of an Irrevocable Life Insurance Trust ("ILIT") which can be funded with life insurance creates opportunities for tremendous tax leverage for future generations. Clients who have illiquid assets, such as a family business or a farm, can use an ILIT to balance out distributions between multiple beneficiaries.

Another strategy that received a reprieve was the use of the Grantor Retained Annuity Trust ("GRAT"). This strategy coupled with an ILIT can make intergenerational wealth transfers a significant part of giving what one has, to whom one wishes, the way one wishes, at the lowest possible tax impact. Those who choose to plan in the next two years will benefit their families significantly over those who do nothing.

The time to do this planning is now! Every day one waits you run the risk of losing these opportunities.