When new tax laws are passed, they often create new tax planning opportunities. Such is the case with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Tax Relief Act”) that was signed into law late last year.
However, these opportunities are scheduled to expire on December 31, 2012, unless Congress acts to extend the 2010 Tax Relief Act.
The 2010 Tax Relief Act offers the following estate and gift planning opportunities for individuals:
- 2010 income tax rates continue for 2011 and 2012.
- Transfer tax exemptions increase to $5 million and tax rate decreases to 35 percent.
- Estate and gift tax exemption “is portable” between spouses.
- Estate tax and modified carryover-basis rules are optional for deaths in 2010.
- Allows direct gifts from IRAs to charities.
The table below illustrates the recent changes under the 2010 Tax Relief Act:
| 2009 | 2010 (opt out) | 2010 (default) | 2011-12 | 2013 | |
| Gift Tax Exemption | $1 million | $1 million | $1 million | $5 million | $1 million |
| Maximum Gift Tax Rate | 45 percent | 35 percent | 35 percent | 35 percent | 55 percent |
| Estate Tax Exemption | $3.5 million | Unlimited | $5 million | $5 million | $1 million |
| Maximum Estate Tax Rate | 45 percent | None | 35 percent | 35 percent | 55 percent |
| GST Tax Exemption | $3.5 million | Unlimited | $5 million | $5 million | $1 million |
| GST Tax Rate | 45 percent | None | 0 percent | 35 percent | 55 percent |
| Portability | No | No | No | Yes | No |
| Basis Step-up regime | Step-up | Modified Carryover | Step-up | Step-up | Step-up |
Planning opportunities
Outright gifts – Lifetime gifts can result in significant income and estate tax savings as the income and appreciation from gifted assets is transferred to the donee. With the $5 million gift tax exemption, a substantial portion of an estate can be transferred estate and gift tax free.
Leveraged gifts – The $5 million generation-skipping transfer (GST) and gift tax exemption also provides several opportunities to pass significant wealth to successive generations with little to no tax consequences through the following planning techniques:
- Grantor Retained Annuity Trust (GRAT)
- Intentionally Defective Grantor Trust (IDGT)
- Qualified Personal Residence Trust (QPRT)
- Charitable Remainder Trusts (CRT) or Charitable Lead Trusts (CLT)
- Family Limited Partnerships (FLP)
The changing tax landscape provides many short-term opportunities that could have positive, long-term effects for individuals. However, these opportunities may only be available through the end of 2012, so it is best to start planning now.
