Assuming the details in the final bill currently under negotiation are not changed, (the discussions surround the amount of the Exemption, and the tax Rate), the unification of Exemptions for lifetime gifts and estates at death opens up great opportunities for our clients.
Under the law before 2010, the exemption for estates increased each year up to the final $3.5 million in 2009-but the amount of lifetime gifts you could make (in excess of annual exclusion gifts of $13,000 per donee) never went above $1 million. The original amount of your death-time Estate Tax Exemption is always (in the past and under proposed law for the next two years) reduced by the amount of the Lifetime Gift Tax Exemption used through lifetime gifts. Don’t forget that all of the Exemptions are available for each parent who takes advantage of them, and one parent can use the others’ gift tax Exemptions and Exclusions if a gift tax return is filed.
Lets illustrate this with an example, assuming a $5 million Exemption. Now our clients can EACH gift, without tax, during life, up to $5 million (or one spouse can gift up to $10 million and use both, as noted above). If they did gift the full Exemption during life, there would be no estate tax Exemption remaining for use on the estate tax return. If one parent gifted $2 million during life, on death their estate would not be taxable until after the first $3 million.
Coupled with the expected continuation of favored estate planning techniques such as Grantor Retained Annuity Trusts (GRATs), and the use of minority interest and marketability discounts on the value of our property subject to estate and gift taxes, this represents a HUGE opportunity to reduce future estate taxes for families whose wealth exceeds the Exemption thresholds.
Previously, the Gift Tax Lifetime Exemption remained lower than the Estate Tax Exemption for a reason: The Congress/IRS didn’t want taxpayers to gift large amounts of wealth to other family members who would pay the taxes on the income produced by the gifted property at lower tax rates-it was to prevent bracket shifting on income tax returns. That strategy has, it seems, been abandoned, and with it, additional tax savings can be generated with thoughtful planning. Interestingly, the Will Doctor points out that the use of Grantor Trusts (where the donor pays income taxes on gifted property) has increased dramatically in recent years, as a better alternative than bracket shifting.
Portability of Estate Tax Exemptions, between spouses is another bonus in the proposed law which will help make sure that parents who are not careful about their estate planning dont loose the ability to use their estate tax Exemptions.
One more point, for now: The ability to make annual tax free gifts of $13,000 per donee continues under the proposed law. This was already indexed for inflation (and will not change in 2011). The unified estate and gift tax exemptions, finally, as proposed, will also be indexed starting next year.