Lower Gift and Estate Taxes Provide New Opportunities in 2011
The Tax Relief Act of 2010 has just been passed into law. This new bill reduces gift and estate taxes for 2011 and 2012, and changes certain estate taxes retroactively for 2010. In general terms, the changes under the new tax law are:
A. Estate and Gift Taxes for 2011 and 2012:
1. Estate tax exemption is raised to $5 million per person and the tax on amounts over $5 million is lowered to 35%.
2. Gift tax exemption is raised to $5 million per person and the tax rate on gifts in excess of the exemption amount is lowered to 35%.
3. Generation-skipping tax exemption is raised to $5 million per person and the tax rate on transfers in excess of the exemption is lowered to 35%.
4. A deceased spouse may leave his or her unused estate tax exemption amount to a surviving spouse, which may be used by the surviving spouse for further lifetime gifts or to shield the surviving spouse's estate from estate tax at death.
B. Taxation of 2010 Estates.
The most significant change for 2010 is the option granted to executors of estates of persons who died in 2010, but only in 2010. The executor may elect to:
(1) administer the estate under the former 2010 estate tax law which provided for no estate tax, regardless of the value of the estate, and allowed a very limited change to the income tax basis of the estate assets; or
(2) administer the estate under the new 2010 Tax Relief Act which retroactively allows the new $5 million estate tax exemption to be applied to 2010 estates, along with a more expanded change in income tax basis for the estate's assets. Estates of persons who died in 2010 will be taxed under the 2010 Tax Relief Act unless the executor elects to treat the estate under the former "no estate tax" rules.
New Opportunities for 2011 and 2012
The change in the gift and estate tax laws for 2011 and 2012 presents some new opportunities, including:
1. Large taxable gifts to family members or friends. The increased $5 million gift tax exemption creates an opportunity to give away up to $5 million of assets during the next two years without paying the 35% gift tax. In addition, gifts in excess of the $5 million exemption amount will be taxed at the lower 35% rate. Furthermore, gifts of fractional interests in real property and gifts of minority interests in businesses may still be "discounted", or valued to reflect the lack of marketability and control associated with the gifted interest.
2. GRATs and residence trusts live on. Despite rumors that the new tax law would reduce the effectiveness of a GRAT (Grantor Retained Annuity Trust), no changes were made. Gifts to family members or friends may still be made using two special trust techniques, the GRAT and the Qualified Personal Residence Trust (QPRT). In each of these trusts, the person making the gift into the trust (who is known as the "grantor") retains a right to a stream of annuity payments from the GRAT, or the right to use the residence in a QPRT, for a term of years selected by the grantor. When the trust terminates after the selected number of years, the gifted asset passes to the remainder beneficiaries of the trust. The value of the gift made to these trusts is reduced (a) because the remaindermen of the trust must wait to receive the gifted asset, and (b) because the grantor retained a right to receive an annuity or to live in the home.
3. Sales of assets in exchange for promissory note. This idea arises not because of the reduced gift and estate taxes in the new tax bill, but rather as a result of today's relatively depressed values of real property and investment assets, in combination with continuing low interest rates on loans between family members. To take advantage of reduced asset values and low interest rates, parents may want to sell assets to their children, either outright or through trusts, in exchange for a promissory note.
4. Pledge tax savings to charity. Teaching young family members the importance of "giving back" to the community is an important value for many families. You may want to consider giving all or part of your tax savings under the new tax bill to charity. Charitable gifts can be made in numerous ways, including:
a. Charitable Reminder Trusts and Charitable Lead Trusts.
b. Donor Advised Funds at a community foundation.
c. Outright gifts to charity.
To discuss the 2010 Tax Relief Act and the opportunities it may provide to you and your family, please call your estate tax attorney at Farella Braun + Martel LLP or your other tax advisors.
Fred Caspersen / [email protected] / 415-954-4427
George Argyris / [email protected] / 415-954-4992
Lara Gilman / [email protected] / 415-954-4913
Kate Ohlandt / [email protected] / 707-967-4156
Barbara Murphy / [email protected] / 415-954-4933
Michael Korbholz / [email protected] / 415-954-4956
Mark Weaver / [email protected] / 415-954-4473
Kristine Waggener / [email protected] / 415-954-4972
Genevieve Larson / [email protected] / 415-954-4931
Evan Abrams / [email protected] / 415-954-4421
This information is provided as a service to our clients and friends. It should be viewed only as an overview of the law, and not as a substitute for legal consultation.