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Take Advantage of Two-Year Window for Huge Estate Planning Opportunities

January 20, 2011 |
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As you may know, the President signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) on December 17, 2010.  The legislation is a sweeping tax package which includes a number of substantial changes to the federal estate, gift and generation skipping tax laws.  However, the law only lasts two years.  This two-year window presents huge estate planning opportunities.

Here is a general overview of the Act’s provisions relating to four areas of concern to many of our clients:

  1. Estate tax law changes for the two year period beginning January 1, 2011 and ending December 31, 2012
  2. Gift tax law changes for the two year period beginning January 1, 2011 and ending December 31, 2012
  3. Taxation of decedent’s estates for those who died in 2010
  4. What may happen in 2013 and beyond

Estate Tax Law Changes for 2011 and 2012

For the period beginning January 1, 2011 and ending December 31, 2012, the estate tax applicable exclusion amount (the “exemption”) is $5,000,000.  For estates in excess of $5,000,000, a flat estate tax rate of 35% will be imposed on the portion of the estate exceeding the exemption.

A married couple can now transfer up to $10,000,000 free of estate tax because the Act provides a significant benefit for married couples referred to as “portability.”  Any unused exemption of a spouse who dies after December 31, 2010, is “portable.”  That is to say, the unused portion of the deceased spouse’s exemption may be added to the surviving spouse’s exemption and is generally available for use by the surviving spouse.

In addition to the increased estate tax exemption, the legislation also provides an increase in the generation skipping transfer (GST) tax exemption (the amount which can pass to family members two or more generations below the transferor without being subjected to a GST tax).   The GST tax exemption amount for the two-year period beginning January 1, 2011 and ending December 31, 2012 is now equal to the estate tax exemption, or $5,000,000.  The increased GST tax exemption presents a significant opportunity for clients to preserve family wealth for future generations.

Gift Tax Law Changes for 2011 and 2012

For the period beginning January 1, 2011 and ending December 31, 2012, the gift tax exemption (the aggregate amount of “taxable gifts” a person can give to a beneficiary during the donor’s lifetime without being subject to federal gift tax) is $5,000,000.  To the extent the combined value of such gifts exceeds $5,000,000, a flat gift tax rate of 35% will apply.

The above-stated GST tax exemption applies to lifetime gifts as well.  It is now possible, with careful planning, to preserve much more family wealth for future generations by taking advantage of the increased gift tax exemption in combination with the increased GST tax exemption.

The increase in the gift and GST tax exemptions presents a tremendous estate tax planning opportunity for clients with substantial estates.  However, the window of opportunity may be fairly narrow, as this law is scheduled to sunset on December 31, 2012.

Estates of Decedents Dying in 2010

Estates of decedents who died in 2010 now have the option of choosing between: (a) being subject estate tax with a $5,000,000 exemption, a 35% tax rate, and a step-up in basis in the decedent’s assets for income tax purposes; or (b) not being subject to the estate tax and receiving a limited step-up in basis in the decedent’s assets (referred to as a modified carry over basis).  Note, however, that estates desiring the “no estate tax” option must make an affirmative election in the time and manner prescribed by the Internal Revenue Service.  If you are administering the estate and/or trust of a decedent who died in 2010, please be sure to contact your attorney to determine which election is the most appropriate for your particular situation.

What May Happen in 2013 and Beyond

If the Act is not extended beyond December 31, 2012, the estate tax and gift tax exemptions will revert to $1,000,000, and the GST tax exemption will revert to approximately $1,400,000.

As a result of the increased transfer tax exemptions, clients, especially married clients, may want to re-examine their current estate plans.


Alan Niebel is a member of the Firm’s Estate Planning Group.  His practice focuses on estate planning, probate, trust administration, business and tax.  Mr. Niebel previously served as a judicial extern to The Honorable Marshall Whitley, Superior Court of California, County of Alameda, Probate Division, and as a law clerk in the Tax Division of the United States Attorney’s Office.

©2011 Berliner Cohen.  This article is not intended to and does not constitute legal advice or a solicitation for the formation of an attorney-client relationship and no attorney-client relationship is created through your use of the Berliner Site or your receipt of the materials.  Attorneys in the Berliner Cohen Estate Planning Group will be pleased to provide further information regarding the matters discussed in this article.