October 2010
Practice Group(s):
Private Clients,
Trusts & Estates
Despite Uncertainty, 2010 Estate Planning
Opportunities are Still Available
As 2010 draws to a close, great uncertainty still exists concerning future federal estate and gift tax
laws. Despite this uncertainty, planning opportunities remain available this year for clients interested
in reducing wealth transfer taxes.
It is well known that the estate and generation-skipping transfer taxes have been suspended for 2010,
and the tax rate on lifetime gifts over a person’s $1 million lifetime exemption has been reduced to 35
percent. A year ago, everyone expected that Congress would act both to prevent the 2010 repeal of the
estate tax and the generation-skipping transfer tax, and to prevent the drop in gift tax rates. Then,
when Congress failed to act last year, it was widely expected that Congress would change the law for
2010 prospectively and perhaps even retroactively to the beginning of the year.
Now that we are in the fourth quarter of 2010, it appears doubtful (though still possible) that Congress
will change the law as it applies to persons dying, or gifts made, in 2010. Effective January 1, 2011,
however, the federal estate and generation-skipping transfer tax will be reinstated at the levels that
applied in 2001 – with a $1 million exemption of assets from estate tax, and tax rates escalating to 55
percent. Although many expect the enactment of new legislation for 2011 and beyond to either
increase the exemption or reduce the tax rates, no consensus exists on what that legislation will look
like or when it will be enacted. The one point most people agree upon, however, is that the estate tax
will be reinstated and will not be permanently repealed.
Although we always encourage our clients to proceed thoughtfully, and with caution, the uncertainty
in future law does not necessarily mean that all clients should take a “wait and see” approach.
Planning opportunities still exist, and the window on some of these opportunities may be closing.
Historically low interest rates make some planning tools, like intra-family loans, sales of assets to
family members either outright or through a grantor trust and transfers to grantor retained annuity
trusts, particularly attractive. If interest rates rise to more normal levels, these tools may not work as
effectively.
Transfers of assets to “zeroed-out” grantor retained annuity trusts have served as a tremendous tool to
transfer future growth in assets to younger generations with little or no gift tax. We expect that
Congress may amend the law applicable to these trusts to make them less attractive by requiring a
longer minimum term or a minimum taxable gift on creation of the trust, or both.
Discounts in determining the value of minority interests in closely held businesses, family limited
partnerships and limited liability companies often reduce the value at which an interest in such a
company can be sold or given to family members for gift and estate tax purposes. As a part of future
tax legislation, Congress may act to reduce these valuation “discounts,” particularly when transfers to
family members, or when passive, non-operating business assets, are involved. And if Congress itself
does not act, it is reported that the Treasury Department is likely to attempt to limit the application of
these discounts through tax regulations.
Further, since the values of many assets have been depressed due to market conditions, if market
conditions improve, many of those who own valuable assets probably will look back at the current
Despite Uncertainty, 2010 Estate Planning Opportunities
are Still Available
environment as an excellent time to have designed and implemented plans to transfer wealth to
younger generations. Transfers of these assets today may allow clients to lock in both the lower
valuations and more favorable wealth transfer tax law.
The generation-skipping transfer tax applies to donative transfers to grandchildren or other
beneficiaries two generations or more below that of the donor. It is imposed in addition to any gift or
estate tax that may otherwise apply to the transfer.
Although the gift tax remains in effect, the so-called GST tax has been suspended for 2010, and it is
now doubtful that this tax will be reinstated retroactively for transfers made this year. Unless Congress
acts otherwise, the GST tax will be reinstated next year, at a flat rate equal to the maximum estate tax
rate (55 percent). Consequently, a limited window of opportunity may be open to make outright gifts
directly to grandchildren or more remote descendants before the end of this year and permanently
avoid this second layer of tax.
Consideration should also be given to the possible GST tax benefits of making outright distributions to
grandchildren from certain existing irrevocable trusts prior to the end of this year.
Each year, a person may make gifts of up to an “annual exclusion” amount to an unlimited number of
persons free from any federal gift tax. This is an effective tool to reduce one’s estate subject to estate
tax at death as well as to provide funds to others without gift taxes. Although each donor receives a
new annual exclusion each calendar year, any unused exemptions from a prior year cannot be carried
forward to the new year. Thus, to take advantage of the current year’s annual exclusion, these gifts
should be completed before year-end.
For gifts made in 2010, this exclusion amount is $13,000 per recipient or up to $26,000 for gifts made
by a married couple.
The judgment and expertise of your estate planning lawyer can be particularly invaluable in
identifying opportunities and pitfalls present in the current environment. If you are interested in
learning more about why now may be a great time to address your estate planning, or if you have any
questions regarding your current estate plan, please contact one of our K&L Gates estate planning
attorneys.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this
communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding
penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter
addressed within.
2
Despite Uncertainty, 2010 Estate Planning Opportunities
are Still Available
3