NORTH BAY – After more than a year of uncertainty due to the lack of an estate tax exemption, there is some clarity, at least for the time being.
Signed into law on Dec. 17 for years 2010 and 2011, both the estate and gift tax exemptions have been set at $5 million with a tax rate of 35 percent for amounts over that. The generation skipping transfer tax is also $5 million with a 35 percent tax rate.
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“The really big change was the gift tax exemption to $5 million from $1 million,” said Steve Goldberg, partner at Friedemann Goldberg, a law firm in Santa Rosa. “That is huge and really significant.”
He said they expect this to be a major boon to clients.
This presents many planning opportunities for taxpayers to transfer significantly more wealth during their lifetimes without paying gift tax.
And for clients north of $10 million if they are a married couple, they can gift or leave that much to their heirs.
Another new piece is portability, Mr. Goldberg said.
“The client can now leave everything to the surviving spouse, including their exemption,” he said.
This is good to the end of 2012, so while it helps in the short term, long-term estate planning is still as uncertain as it has been for a while.
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“They integrated the gift tax with estate tax,” said Ed Osborn, principal at Bingham, Osborn & Scarborough, a wealth management firm in Healdsburg.
“If you wanted to use your entire $10 million during your life, you could,” he said.
Additionally, the annual gift tax exemption is $13,000 per person per year.
“If you have four children you could gift them $13,000, and you can do the same for their spouses and children,” he said.
For the North Bay, Mr. Osborn said all of these changes will have a significant impact.
“So many estates are tied up in illiquid assets,” he said. “These are in real estate or small businesses, and if someone dies, then there will be liquidation and a large estate to deal with.”
With the legislative change, a two-year Grantor Retained Annuity Trust, commonly referred to as a GRAT, is still permitted, experts said.
A GRAT allows large financial gifts to be made to family members without paying a gift tax.
The typical donor would put a large stock account into the GRAT and have it set up for a two-year period. During that term, the GRAT makes two annual payments, each equal to about 52 percent of the GRAT’s initial value. Any stock return greater than the interest rate that applies to GRATs, which was 2.4 percent in January 2009 as determined by the IRS, goes to the beneficiaries. Both the percentages fluctuate based on current interest rates.
For those who died in 2010, executors have a choice. The default rule is that the estate tax regime applies at a 35 percent rate and a $5 million estate tax exemption. The executor can opt out of the estate tax regime and opt for the carry-over basis regime. The due date for the estate tax return or the return reporting carry-over basis is now nine months following date of the enactment of the act, Sept. 17, 2011, and not nine months from the date of death.