Still, much uncertainty remains about what’s ahead for gift, other taxes
NORTH BAY — Estate tax and law experts are telling clients that the time to plan is now, while there is some clarity on a long-contentious issue that could easily change again in the not-so-distant future.
In late 2010, Congress changed the gift tax exemption from $1 million for individuals and $2 million for married couples to $5 million for individuals and $10 million for married couples. The rate of the estate tax was also lowered to 35 percent from 45 percent — welcome changes that were viewed as far more favorable for those looking to pass on valuable estates or cash.
But the exemptions and reduced tax rate last only through 2012 — meaning when the rates expire, it’s anyone’s guess as to where things will stand.
“The biggest thing by far is the fact that for two years, Congress has totally changed the exemption before you start paying a tax,” said Nick Donovan, a partner at Napa-based law firm Gaw Van Male. “It makes it a really great time to do some estate planning. If you don’t do so, there’s a sense that it will change.”
Joseph Kitts, a tax partner in the Santa Rosa office of Burr Pilger Mayer, agreed that now is optimal timing for estate planning, given the volatile legislative history of the matter. Come 2012, the rate and the exemptions are likely to revert back to 2009 levels of 45 percent and $1 million per individual, he said, pending political action to prevent that.
“I think estate planners expect that there will not be changes through 2012, but the point is that estate planning has become much more dynamic, because now estate tax and income tax are factored in for budget changes, and with the frequent law changes, it makes it difficult to minimize the uncertainties,” Mr. Kitts said. “For now, [the message to] individuals with wealth — turbo charge your planning in 2011 and 2012.”
The filing threshold has gradually increased from $675,000 in 2001 to $3.5 million in 2009. The estate tax was temporarily repealed in 2010, but was reinstated on a retroactive basis with the $5 million exemption and 35 percent rate last December.
Jay Silverstein, a principal in the Santa Rosa office of Moss Adams, said there are several reasons why the timing is optimal for planning.
“One of them is obviously the change that was made in the estate law in 2010, bringing back the estate tax and the exemption, and more importantly the gift threshold of $5 million,” he said. “That combined with the economic conditions makes this a great opportunity.”
Both Mr. Donovan and Mr. Kitts said a key component of the 2010 changes was the reunification of the gift tax, estate tax, and a generational skipping tax, which made estate planning logistically much easier.
“The reason why that’s a big deal is a lot of people have already used the $1 million exemption,” Mr. Donovan said.
That means the gifting individual or couple could make an additional $4 million or $8 million gift without any payment on the gift tax, according to Mr. Kitts.
Mr. Donovan and Mr. Silverstein said the current economic landscape may make gifting now a wise move.
“Values are really low with the bad economy, so you really can get a lot of benefit out of giving things now,” Mr. Donovan said. “Once you gift it out of your estate, there’s no tax.”
Mr. Kitts said high -net worth individuals in particular should view the current environment as ideal for estate planning–before things change again.
“For people with wealth exceeding $10 million, they should use their exemption now, and for people under the $10 million threshold, they want to consider their planning. They won’t owe an estate tax if they don’t change, but if [rates and the exemption] revert back, they need to be prepared,” Mr. Kitts said.
Mr. Silverstein agreed: “For a large estate, it really gives us a great opportunity to transfer a large amount of wealth while minimizing the impact of the tax,” he said.
The changes in the law contain other elements that could be useful for high-wealth individuals or couples, such as “portability” and a grantor retained annuity trust, or GRAT, as it is commonly called, Mr. Donovan said.
Portability allows an individual to leave all assets with a spouse, including the exemption. GRATs allow large financial gifts to be made, but essentially without the gift tax, according to Mr. Donovan.
“It’s a type of trust that you can give away for little or no consequence,” he said.
It remains unclear at this point on whether those tools will still be permitted after 2012, said Mr. Silverstein. Coupled with the uncertainty on the tax rate and allowed exemptions, the political uncertainty surrounding the estate tax should be a significant motivating factor, he said.
“With the back drop on that, the potential for a rate increase in 2012, that’s really the driving force behind all of this,” he said.
According to the IRS, for filing year 2009, estates with gross assets above the threshold reported over $194 billion in assets.
While a lot can happen in Congress between now and 2012, discussions are already under way by some to alter the gift and estate tax exemption and rates, Mr. Kitts and Mr. Silverstein said, both noting that the so-called Super Committee tasked with finding revenue sources for President Obama’s latest jobs plan could be looking closely at the lucrative tax.
“You have proposals on a huge spectrum from eliminating it and putting it back together to 55 percent,” Mr. Kitts said. “It’s a political football, and no one is certain as where that ball will land.”
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