By Jeffrey M. Verdon, Esq. Managing Partner, Jeffrey M. Verdon Law Group, LLP

The new estate and gift tax rules created under the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (the Act) are generous but, unfortunately, only temporary. Below is a summary of a few of the important estate and gift tax provisions of the Act, and which planning techniques remain viable, before the law expires on December 31, 2012.This may serve as some “talking points” between an individual and his or her advisor.

A portion of the Act applies to decedents who died in 2010.This article will not address these rules, as the author assumes the reader will be looking at the new rules prospectively. However, it is important to note that, under the Act, the general presumption is that the estate tax applies to all estates in 2010.Thus, one needs to affirmatively elect out of the estate tax.( Election out of estate tax would result in application of the modified carryover basis rules.)

Prospectively, the Act increases the amount that one can give away or die possessing (without being subject to gift or estate tax) from $1 million to $5 million, but only through December 31, 2012. (The new law sunsets in 2013 and reverts back to the 2001 law so take advantage of these benefits while they last.).

Some key points of the Act:

  • Effective date of the Act: January 1, 2010.
  • $5 million estate tax exemption (now called the basic exclusion amount):
      • Indexed for inflation in 2012.
      • 35 percent marginal tax rate.
  • Portability of estate tax exclusion:
    • Permits executor to either utilize the decedent’s $5 million basic exclusion amount or to transfer it to the decedent’s surviving spouse – called Deceased Spousal Unused Exclusion Amount.
      • Does not get indexed for inflation.
      • May receive from multiple spouses, but may not exceed $5 million.
  • Reunification of the gift and estate tax exclusions:
    • $5 million gift tax exclusion (with a 35 percent gift tax rate) would apply to gifts after 12/31/2010.
    • Married couples can combine their exclusion for a total of $10 million.

What is also interesting is what the law “did not” change. For example, discounting using family partnerships, LLCs and similar devices is still available. Moreover, Congress did not place any restrictions on GRATs.

The changes in the law, along with the remnants of the old law, have a very important impact on current estate planning techniques and tools. In particular, clients and their advisors should consider the following:

  • Review old “formula” clauses related to estate and generation-skipping tax exemptions.
  • Review rules for qualifying for Medicaid for the Trust.
  • More emphasis on planning for the children.
  • Designating a trust to be the beneficiary of your IRA to stretch the tax deferral.
  • Increased use of Dynasty Trusts.
  • Installment sales to family members or Intentionally Defective Grantor Trusts (“IDGT”).
    • January mid-term AFR is 1.95 percent.
    • Consider use of self canceling installment notes (“SCIN”).
  • Using the Nevada Restricted LLC for greater discounts.
  • Continued use of the Qualified Personal Residence Trust (“QPRT”).  Moreover, you can shorten the term of the remainder with the larger gift tax exclusion.
  • Continued use of asset protection trusts in order to protect against lawsuits and other third party claims.