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September 22, 2011
Estate and Gift Tax Law Changes — Effective For 2011 And 2012

In December 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the 2010 Act). The 2010 Act extends the Bush-era income tax cuts for two years preserving (until the end of 2012) low tax rates for income, capital gains and dividends.

The 2010 Act also increases the federal estate, gift and generation skipping exclusion amounts through 2012 and lowers transfer tax rates as follows:

  • Estate Tax: Each individual now has a $5 million exemption ($10 million for married couples), with a tax rate of 35% over the exemption amount.
  • Gift Tax: Each individual now has a $5 million exemption ($10 million for married couples). Exemption amounts used for lifetime gifts will be charged against the estate tax exemption. The tax rate is 35%.
  • Portability: For 2011 and 2012, a deceased spouse’s estate may transfer any unused federal estate tax exemption to the surviving spouse (called “portability”). This means that if the first of a couple to die does not use all of the allowed exemption, his or her surviving spouse may utilize the unused portion of the deceased spouse’s exemption, in addition to his or her own exemption.
  • GST Tax: The exemption amount for generation skipping transfers is also $5 million. The tax rate is 35%.
  • Sunset Provision: Unless Congress acts, these changes expire on December 31, 2012. If this happens, under current law the exemptions will return to $1 million and the maximum rate will return to 55%.

Planning Implications

The higher exemptions and lower rates expand, at least for 2011 and 2012, the ability to preserve and transfer wealth to future generations. The “sunset” provision creates uncertainty for everyone.

Opportunities

For clients with substantial wealth, 2011 and 2012 offer an enlarged opportunity to make wealth transfers with no gift taxes payable. Some clients with modest estates may now have a simpler plan without adverse federal estate tax considerations.

Uncertainties

What rules will apply after 2012? Will the high exemptions remain or be reduced, possibly to $1 million?

Unintended consequences

If you have an estate plan that uses an exemption-based formula to divide assets between an exemption share and a marital share, the much higher exemption may result in a distribution of your estate that is not what you intend.

Minnesota estate tax

Minnesota has its own estate tax, but the Minnesota exemption is only $1,000,000. Estates in the one million to five million range should consider changes to avoid or reduce Minnesota estate tax.

For more information or questions about our Private Wealth Planning services contact any one of our attorneys: William R. Asp, John A. Burton, Jr., Robert L. Crosby, Steven R. Kruger, E. Joseph LaFave,  Mary E. Shearen.

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