Estate taxes: It’s now time to take a closer look

  • Wed Oct 27th, 2010 4:09pm

By Noni LaLone Moss Adams LLP

We’re now at the end of 2010 and because Congress failed to pass legislation that would have extended the estate and generation-skipping transfer taxes, your estate plan may not even come close to achieving your intended objectives.

Not paying taxes on your estate may sound appealing; however, you may not realize that certain clauses in your plan could actually result in completely shutting out your spouse from your estate.

Let’s start with an overview of the basics. The rules for 2010 are:

Estate and Generation Skipping Transfer (“GST”) taxes are repealed;

The gift tax exemption is $1 million;

The annual exclusion is $13,000 per donee;

The highest marginal gift tax rate is 35 percent; and

Step-up in basis is limited to $1.3 million per decedent, plus a $3 million marital exception, if applicable.

Absent a change in legislation, the rules for 2011 are:

The estate and gift tax exemption will be $1 million;

The annual exclusion will be $13,000 per donee, adjusted for inflation;

The GST exemption will be approximately $1.3 million, since it will be adjusted for inflation occurring since 2001;

The highest marginal estate and gift tax rate will be 55 percent, plus a 5 percent surcharge on estates valued at more than $10 million; and

Similar to the rules that existed before 2010, the income-tax basis in most assets will be equal to the then-fair-market value.

One aspect you may want to consider: Many wills and living trusts are structured with “AB Trust” provisions, dividing the estate between a marital share passing to the spouse (or a marital trust) and a nonmarital share passing to heirs (or a bypass trust). Often the marital share uses fractions or percentages to fund the trust with assets up to the maximum tax-free amount. This formula could result in a zero marital share, leaving the entire estate to your nonspouse heir(s).

It is uncertain whether Congress will address the estate issue before 2010 ends. If a law is passed, the constitutionality of retroactive reinstatement of estate and GST is questionable. Therefore, the current state of affairs may present unique planning opportunities.

After careful consideration of the financial wisdom of doing so, you might want to consider taking advantage of the elimination of the GST and the reduced maximum gift tax rate. Strategies may include increased gifting and/or, in the right circumstances, installment sales — especially to or for children or grandchildren while determining the most beneficial manner of doing so — all aligned with your business and financial objectives for your surviving spouse, family members and, if desired, charity.

It’s important to remember that your situation is unique. Everyone has a different financial scenario, family circumstances and motivations and hopes for their estate plan. These differences require you to develop a customized estate plan to fit your goals. For specific advice, meet with your accounting or legal adviser to take a closer look at your estate plan before making changes.

Noni LaLone is a tax partner with Moss Adams LLP in Everett. She primarily serves closely held businesses, high net-worth individuals and families. She can be reached at 425-317-3045 or noni.lalone@