$5 Million Estate and Gift Exemption Impacts Planning

$5 Million Estate and Gift Exemption Impacts Planning

By by Martin M. Shenkman, CPA, MBA, JD

Let’s try the Estate Planning New Normal on for size with $5 million gift, estate and GST exemptions in 2011 and 2012 and a mere 35% rate. In 2013, absent Congressional action, a $1 million estate and gift exclusion (with a $1 million indexed GST exemption) and 55% rate will again become law. This sounds like the uncertainty of 2010 all over again. If the $5 million inflation-indexed exclusion were to remain law, along with portability:

  • Very few Americans would ever have to consider the federal estate tax. The vast majority of taxpayers could address and focus on the nontax aspects of their estate planning, and perhaps address state estate tax and income tax considerations.
  • Ultra-high net worth taxpayers probably should plan aggressively and view 2011 and 2012 as a last window of opportunity. GRATs, discounts, and other planning that had been on the short list for restriction or repeal, remain part of their planners’ toolkit. After 2013, they could be lost along with the generous exemption.
If the $5 million inflation indexed exclusion will be eliminated and the $1 million exclusion and 55 percent rate were to return:
  • Many Americans may get caught in a costly tax. Thus, a significant portion of taxpayers should address the potential of a future federal estate tax applying to them.
  • Ultra-high net worth taxpayers probably should plan really aggressively for the reasons noted here. The $4 million dollar question is what happens if these ultra-wealthy clients make $5 million gifts in 2011 and in 2013 the exclusion drops to $1 million. One would believe (hope?) the tax man would not appear on their doorstep.
The reality is that many taxpayers will be loath to incur the cost and unpleasantness of sophisticated tax planning. Perhaps these taxpayers should evaluate less costly and simpler techniques that might carry them through the uncertainty. It is certainly advisable for the mere wealthy (i.e. those with substantial net worth that are not in the “ultra” category that should pursue tax planning no matter what) to plan now and not wait for what might be adverse tax news in but a few years. For these taxpayers, revising estate planning documents to address the full range of potential tax law scenarios (didn’t everyone learn the lesson of simple formula clauses in 2010?) should be a starting point. Perhaps including broad gift provisions in powers of attorney to facilitate future planning is advisable for some. Use of insurance trusts to assure life insurance is outside of a taxable estate if the 2013 year brings stringent estate tax rules is worthwhile. Finally, consideration to using some of the large $5 million gift exemption while it is available, should be considered. For the wealthier taxpayers who might be subject to an estate tax even with the $5 million exclusion, more aggressive planning to reduce their estates in advance of 2013 warrants consideration. In particular, the expanded $5 million gift exemption opens the doors to a variety of possible planning strategies. However, those on the cusp of the estate tax with the $5 million exclusion and portability should plan as well. Finally, for the ultra-high net worth families, those with $10 to $15 million and above, aggressive planning to use the new opportunities of TRA should be pursued.

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