Estate Planning Before the New Year

In Time of uncertains laws, your best strategy is to build flexibility into your estate and trust plan with these considerations.


By Joe Kitts, BPM Partner, and Joni Fritsche, BPM Director


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Obama's 2-year tax proposal sets a 35% estate and gift tax rate and a $5 million estate tax exemption for 2011 and 2012. If there are no retroactive proposals for 2010, and if Congress adopts Obama's deal in some form this week, estate planning before the New Year can commence with some certainty i.e., the estate tax and generation skipping tax (GST) was repealed for 2010 and there has been great uncertainty related to the current and future estate and gift tax laws.

Even though there is no estate tax and GST for 2010, the gift tax remains with a 35% rate and a $1 million exemption per person as shown in the chart below. If Congress does not pass Obama's tax deal, the 2011 estate tax reverts back to the 2001 exemption of $1 million with a tax rate up to 55%.


Year Estate & GST Tax Exemption Estate Tax Rate Gift Tax Exemption  Gift Tax Rate  Annual Gift Exclusion Amount
2009 $3,500,000 45% $1,000,000 45% $13,000
2010 No Estate or GST Tax No Estate or GST Tax $1,000,000 35% $13,000
2011 $1,000,000 55% $1,000,000 55% $13,000
Obama's Deal 2011 & 2012? $5,000,000? 35%? $1,000,000? 35%? $13,000

This year's estate planning opportunities are high given the low interest rates, possible depressed asset values, a lower gift tax rate of 35%, no estate tax and GST, and the potential restrictions on planning with discounts or grantor retained annuity trusts (GRATs) looming in the future. Now is the time to discuss your estate planning with your accountant, attorney, and financial advisor, to determine what opportunities have been created through Congressional action on the Obama tax deal this week.

How do I begin planning for my estate?

First, you will need to carefully consider your personal and financial goals so that you can clearly define them with your advisors. With a list of your assets and liabilities, you and your advisors can lay out your current estate plan as provided in your will and trust agreement, and identify planning opportunities that fit your situation. Note that in 2010, particular attention must be given to the trust funding formulas and other dispositive provisions in your will and trust agreement to assure that they direct your assets to the desired beneficiaries. Also be aware that some states (but not California) do have an estate or inheritance tax, so assets owned in other states should be evaluated for potential tax.

If the 2010 rules remain unchanged, although there is no estate tax or GST, the step-up in basis allowed at death is only $1.3 million to non-spouse beneficiaries with an additional $3 million for spouses. You should consider how a death in 2010 will impact the basis step-up among the beneficiaries as those decisions will likely affect their capital gains tax when they sell the inherited assets. Also consider adding a trust provision granting the Trustee authority to allocate tax basis to avoid potential beneficiary conflicts.

What planning opportunities are available?

Truly the most powerful estate planning tool is to transfer assets to children and grandchildren early and often, and when this is done you remove the future appreciation on these transferred assets from your estate and all of the related estate tax and/or GST as well. Target those assets with the greatest potential for future appreciation to maximize your transfer benefits. Each person may make gifts up to $13,000/year to an unlimited number or people without any further gift or estate tax consequences, a powerful planning tool when implemented over many years.

Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs) are the business entities most often used to hold and efficiently transfer family business and investment interests. Most closely held and family businesses are well suited to FLPs and LLCs, and the current low interest rates and depressed asset values add incentives to establish these entities and complete ownership transfers as soon as possible.

Irrevocable trusts offer a variety of planning opportunities that help transfer assets. Some irrevocable trusts include gifts made for benefit of your children and grandchildren. Other trusts may allow you to retain some interest in the assets being transferred to younger generations, such as the grantor retained annuity trusts (GRATs), intentionally defective grantor trusts (IDGTs), the qualified personal residence trusts (QPRTs), and charitable remainder trusts (CRTs). You should discuss using such trusts with your advisors to determine which may be suitable for your situation.

Qualified Small Business Stock (QSBS) is one of the investments your FLPs, LLCs, or trusts, should consider purchasing this year. If held for more than 5 years, sale of this stock escapes all regular and AMT taxes, with the exclusion limited to the greater of 10 times your income tax basis in the shares or $10 million. There are many restrictions; QSBS purchases only include originally issued shares purchased from the company after 9/27/10 and before 1/1/11, in certain C corporations with active businesses, but not including companies in personal services, brokerage, banking, farming, oil and gas, lodging, restaurants, and similar businesses. The assets of the company may not exceed $50 million.

Taxable gifts in 2010 may be beneficial for those with estates likely to exceed the estate tax exemption amounts. The gift tax rate is currently 35%, but future rates may be 45-55%. Gifting assets that appreciate outside your estate is an effective way to minimize future estate and/or gift tax. Making taxable gifts (those above your $1 million lifetime exclusion) can leave more dollars to your heirs compared to leaving dollars that are subject to estate tax.

No GST in 2010, unless Congress reinstates it retroactively, so consider making large direct gifts to grandchildren 18 years or older potentially free of GST (bearing in mind that gift tax could still be due). If you are the trustee of a GST trust not exempt from the GST tax, consider larger trust distributions in 2010 when there is no GST. Note that gifts to minors (under age 18) or to trusts for grandchildren create additional considerations that need to be discussed with your tax advisors.

Consult with your advisors soon to discuss the status of the Obama tax deal and the above opportunities, and other strategies will certainly evolve from your planning meetings. There is much to consider, and the planning window for 2010 is about to close.