Shapeshifter Estate Tax

 Quickie Summary

By the time you receive this newsletter you’ll have undoubtedly been bombarded by summaries of the 2010 Tax Act and its impact on estate planning. So here’s the Cliff Notes:   In the waning days of 2010 Congress made the estate tax retroactive to January 1, 2010 with a $5 million estate and GST exclusion, a 0% GST rate in 2010, and a 35% rate for gift, estate and GST. Executors have the option of electing the carryover basis regime for those dying in 2010 (in English that means the kids of the fact cats who died in 2010 pay no estate tax).   In 2011 and 2012 the gift, estate and GST exemption is $5M. It’s indexed in 2012 for inflation, but that’s a peanut for now. Portability – if your spouse dies before you, on your death your estate may be able to use his/her unused exemption. In 2013 the exclusion is back to $1M with a 55% rate, well, at least that’s what’s on the books. Sounds simple. For almost everyone you can just ignore the estate tax and do an Alfred E. Neuman: "What! Me Worry?" Sorry folks ya’ still got lots of worrying (and work) to do.


Prior to the 2010 Tax Act you had to do a bypass trust and carefully divide the ownership of your assets to safeguard your spouse’s estate tax exemption. The 2010 Tax Act created a new concept called portability so theoretically you can use your spouse’s exemption with no effort. Well, theoretically I can still eat lots of cheesecake but look like the ripped guy on the TV infomercials if I only buy that ab machine for 12 easy payments of $9.95! So much for theory and so much for portability. The rule only exists for 2011-12. GST benefits aren’t portable. Out right bequests provide no protection from post-death inflation of the first of you and your spouse to die. Outright bequests could end up with the new spouse and not your kids. Need we go on?


No one coulda described it better than Yogi Berra: "This is like deja vu all over again."  $1M/55%. In 2012 your estate planner and CPA will be calling mumbling incoherently about the next changes in the estate tax rules. Didn’t you have enough of that confusion in 2009 and 2010? Here’s some of the 2013 possibilities (they’re making odds on each possibility in Vegas): $1M/55%. While most tax experts believe this is unlikely not planning for could be the costliest mistake you’ve ever made. But depending on your situation, there may be less costly and more flexible ways to address this possibility.   Continue the $5M/35%. Continue the $5M/35% but eliminate our favorite tax toys: discounts, GRATs, Crummey powers, etc. That would goose up revenue but not superficially take back what was given. $3.5M/45% which is what most thought would happen. This could be with, or without GRATs, discounts, etc. Repeal the estate tax (looking more likely than before according to some).

 What Repeal Could Bring

But if they repeal the estate tax what will they do? Here’s a possibility. Repeal estate tax and instead charge a capital gains tax on all assets on your final income tax return. No issue there with taxing what was already taxed, it wasn’t. This solves the step up in basis issue at death, you appraise everything and pay your capital gains tax. The really ultra-wealth folks that complained about the estate tax rate shouldn’t gripe because the rate would be the low capital gains rate. But if this is done the gift tax will have to remain because it would be essential to back stop the estate tax. That could mean a $1M lifetime gift exclusion. Yet another reason certain groups of taxpayers need to plan now and plan fast.

What to do Now

Everyone (yes you too!) has to revise their planning first, their documents second. Everything has changed. Formula clauses from old documents probably won’t work (that could undermine your entire dispositive scheme). Some of you should be planning like “all get out.” Others might actually creatively scale back and simplify planning. Portability won’t fix a will with a formula clause created when the estate tax world was different. State estate tax remains a thorn (not big enough to justify significant planning, but too painful for many to ignore).

 The Dirty Little Secret

For folks with $2M to $5M estates in the past planning might have been accomplished with a bypass trust, dividing assets and an insurance trust owning some life insurance. Most of your planners could do that on autopilot. Most of the time and gray matter they devoted to you was spend on a myriad of other planning issues. Even if you’re so far under the estate tax radar that estate tax is not a concern (but read Yogi Berra’s quote above), you still need all the other “stuff” your planners addressed before. “Estate Planning” was too often viewed as “Federal Estate Tax Minimization Planning”. The latter was never more than a component of the broader planning picture. So even if the federal estate tax has disappeared (and it hasn’t), the rest of the “plan” is still vital.

 Estate Planning for Real People

Estate planning should have always addressed a myriad of personal issues. Do you have sufficient assets for retirement? Do you equalize gifts or bequests to your children? Do you equally or equitably divide your estate? Religious issues. Planning for illness or disability. And more.

 How to Plan

  If your wealth could subject you to estate tax under the $5M exemption you should use these beneficial tax  breaks and aggressively plan. If you’re under the tax radar today, but might not be in 2013, plan, but creatively and flexibly so that what you do is protective of a bad 2013 tax outcome, but not so costly or immutable that you’re unduly hampered by the result if the estate tax is repealed. If you’re confident you’ll always be below the estate tax radar, revise your plan and documents so that they work under the new paradigm and the 2013 scenarios listed above. If asset or malpractice protection is a concern for you, jump all over these tax breaks and exploit this historic opportunity to shift wealth into protective structures. If the gift exemption drops to $1M in 2013 you will have lost a unique chance to protect your wealth. Non-married partners should use the new exemption to equalize wealth between partners the low gift tax exclusion and lack of gift tax marital deduction had prevented this in the past. But the $5M exclusion may afford the first great opportunity to shift wealth without a tax. Portability is not available to non-married partners (the bias in the law was continued).

 More Info

We provided email subscribers with a wealth of information on the law as it developed from mid-December onward, as well as notices of seminars, webinars and two books. Much of this has been posted on If you missed these and want to be included in future mailings of white papers and other materials go to and sign up for the email version of this newsletter which will include all mailings. For laypersons an e-book “Estate Planning after the 2010 Tax Act” is available for $10 on Amazon. For professionals a comprehensive book analyzing the 2010 Tax Act, power points, webcasts and more is available from the American Institute of CPAs. The product is called Estate Planning after the Tax Relief and Job Creation Act of 2010: Tools, Tips, and Tactics, and is co-authored by Martin Shenkman and Steve Akers (Product No. 091056HS). A more comprehensive product that will include additional analysis, consumer power points that can be used by professionals to educate their clients and prospects about the new law, and more, will be available from the American Bar Association shortly.

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