Originally Published in the Laconia Citizen, April 2011
As the saying goes, there is nothing certain in life but death
and taxes. Be that as it may, even these realities pose lots of
uncertainties. None of us knows when our time will come, and the
tax consequences we face largely depend upon the time of our
death.
The best any of us can do about either is to be prepared. When it
comes to the latter, that means keeping our estate plans current,
and updating our plans when the laws change.
At the end of 2010, President Obama signed The Tax Relief,
Unemployment Insurance Reauthorization and Job Creation Act of
2010 (the "2010 Tax Relief Act" or "Act").
Under the Act, the federal estate tax (which was suspended in 2010)
is reinstated with the applicable exclusion amount
("exemption") of $5 million for each
individual and a top estate tax rate of 35% for estate assets over
the exemption amount. This law will automatically expire on
December 31, 2012 unless Congress votes to reauthorize it. The
exemption amount will drop back to $1 million for
each individual on January 1, 2013, with a
55% estate tax rate.
Let's take a look at the specific provisions of the Act and
what you should do to take advantage of the change in your own
estate plan.
Exemption Amounts. Under the Tax Relief Act, the
estate and gift tax exemptions are reunified. This means that as of
January 1, 2011 the gift tax exemption for gifts made during life
will increase from $1 Million (where it has been for the past 10
years) to $5 Million for each individual, and the rate for gifts
over that amount is 35%.
Why this might matter to you: This increase in the
gift tax exemption offers significant new planning opportunities
for those individuals who wish to make lifetime gifts to family
members or others which exceed $1 Million. The "annual
exclusion" gift amount (i.e. gifts that can be made to anyone
without reporting the gift to the IRS) will remain at $13,000 per
person.
Portability. One of the striking features of the
new Act is the concept of "portability" of the estate and
gift tax exemptions. The Act makes it possible for spouses to
"stack" exemptions by the transfer of any unused portion
of a decedent's $5 Million estate tax exemption to his or her
surviving spouse. The effect of this law is to allow a couple, with
careful planning, to shelter up to $10 Million from federal estate
taxes. For example, if one spouse dies in 2011 and fails to use her
entire $5 Million exemption, the surviving spouse will be able to
use the decedent's unused exemption, which can then be added to
his own $5 Million exemption.
Why this might matter to you: Despite the fact
that portability of exemptions may be available, married
individuals should continue to have separate estate planning trusts
for a variety of reasons (asset protection and reduced estate tax
liability to name a few), with the uncertainty of the law after
2012 being the most important.
GST Tax. Another important provision of the Act is
the increase in the generation-skipping transfer ("GST")
tax exclusion amount to $5 Million. The GST tax is an additional
tax on gifts and transfers to "skip persons", generally
including grandchildren.
Why this might matter to you: From now through 2012, grandparents
have a unique opportunity to pass onto their grandchildren up to $5
Million in assets without incurring a GST tax.
GRATs. The 2010 Tax Relief Act does not include
any new restrictions on Grantor Retained Annuity Trusts
("GRATs") or the use of entity discounts in estate
planning transactions. A GRAT is an irrevocable trust that pays a
fixed annuity to the grantor for a defined period and then pays the
remainder to a non-charitable beneficiary. Typically a parent might
use a GRAT to transfer appreciating assets to children at a very
low gift tax rate.
Why this might matter to you: In this era of low
interest rates and high gift tax exemptions, GRATs are an important
and popular estate planning tool.
IRA Roll-Over. Of course, the provisions of the
2010 Tax Relief Act are not limited to estate, gift and GST taxes.
One significant feature of the Act extends the IRA
"roll-over" to charity.
Why this might matter to you: This provision allows individuals who
are 70 ½ or older to make qualified distributions of up to
$100,000 from an IRA directly to a qualified charity.
GENERAL ESTATE PLANNING CONCERNS
Although estate taxes play an important role in almost every
estate plan, they are secondary to accomplishing your primary goal
of providing for the future success of your family, both personally
and financially. Estate planning also involves having "advance
directives" in the event of incapacity during life, as well as
probate avoidance, asset protection, business continuity,
guardianship, and a host of other issues. It is important to have
an estate plan which protects the wellbeing of your family and
achieves your personal goals, regardless of the tax environment.
Estate planning should go far beyond simply having a will.
For instance, a common way to avoid probate and the attendant cost
and delays is to use a revocable trust, also known as a
"living" or "inter vivos" trust. An individual
may avoid probate by creating and funding such a trust during life.
Your will, together with the trust, governs how and to whom you
wish to leave your estate, including when and under what
circumstances. Trusts may have many other benefits than simply
avoiding probate. Trusts may also protect the family assets from
spendthrifts and creditors (such as divorcing spouses) and provide
for minors and special needs.
Another important set of documents are the so-called "advance directives" which allow you to select a person to make health care and financial decisions in the event you are incapacitated. Many people are surprised to learn that family members (including the spouse or the parents of children over the age of 18) are not authorized to make decisions on behalf of an incapacitated family member. The New Hampshire Durable Power of Attorney for Health Care allows you to designate a person (called your agent) to make health care decisions if you become incapable of making such decisions. The health care decisions that the attorney-in-fact makes includes the release of medical information, placement in a nursing home or medical facility, and the authorization or termination of medical and life-sustaining procedures. You can state your wish to be an organ donor or to donate your body for medical research. The Living Will portion of the document permits you to avoid the unnecessary prolongation of life in the situation in which you do not wish to be kept alive by life support when there is no hope for your recovery as determined by two physicians or a physician and an ARNP. The General Financial Power of Attorney operates in the same manner as the Health Care Power of Attorney discussed above, but pertains to financial matters. Without these documents, your family will be forced to go to court to get a guardianship, which is expensive and time consuming.
The role of your estate planning attorney is to help sort out your financial and personal priorities and clarify your goals. Although tax savings is important, the long-term security and protection of your family is, in the end, the principal purpose of estate planning. Make a resolution to give your estate plan a check-up soon in order to take advantage of the potential tax savings offered over the next two years.
Alexandra T. Breed is a Director in the Trusts and Estates Department of McLane, Graf, Raulerson & Middleton, Professional Association.
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