Eastman & Smith Alert - Estate Planning Under the 2010 Tax Law Changes


Congress, to the surprise of most observers, included very favorable estate tax provisions in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the 2010 Act), which was enacted December 17, 2010.

The 2010 Act, for the years 2011 and 2012 only, provides for a $5 million exemption (indexed for inflation in 2012) from federal estate tax, gift tax and generation-skipping transfer (GST) tax. In addition, the unused portion of the federal estate tax exemption of the first spouse to die may be transferred to the surviving spouse (so-called portability), which makes it possible for a married couple to transfer up to $10 million free of federal estate tax.

Many couples have created trusts which, at the first death, divide into a marital trust (Trust A) and a credit shelter trust (Trust B). The credit shelter trust is excludable from federal estate tax at the death of the surviving spouse. With the new portability provision, a credit shelter trust may be unnecessary. However, a credit shelter trust still has advantages such as:

On the other hand, the income tax basis of assets in the credit shelter trust is not stepped up again at the second death, possibly resulting in capital gains tax to the children with no estate tax benefit. Therefore, whether a credit shelter trust is advisable depends upon the facts of each individual case, and the best alternative may be a disclaimer trust, which gives the surviving spouse nine months to decide whether to disclaim all or a portion of the marital trust to create the credit shelter trust.

Asset titling will continue to be important in order to maximize portability of the estate tax exemption. The objective will be to maximize the estate of the first spouse to die. Including in trusts a general power of appointment for the first spouse to die (exercised currently, but effective immediately prior to death) can (i) maximize portability of the federal estate tax exemption, and (ii) potentially maximize the basis step-up in the first estate.

The 2010 Act, by increasing the lifetime gift tax exemption from $1 million to $5 million, and by omitting anticipated provisions such as limits on GRATs and elimination of valuation discounts, also provides unprecedented opportunities for wealth shifting in 2011 and 2012. Especially attractive will be estate freezing techniques such as gifts using the lifetime exclusion, grantor retained annuity trusts (GRATs), sales to grantor trusts, and qualified personal residence trusts (QPRTs).

The above changes strongly suggest that all taxpayers should now review their estate plans in order to take full advantage of the tax-saving opportunities provided by the 2010 Act.