sunrise, sunset: the federal estate tax is back

Sunrise, Sunset: Sunrise, Sunset: The Federal Estate Tax is The Federal Estate Tax is

BackBackVictor S. Elgort, Esq.

Kenneth D. Meskin, Esq.Jill Lebowitz, Esq.

The material provided herein is for informational purposes only and is not intended as legal advice or

counsel.

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Please help yourself to food and drinksPlease let us know if the room temperature is too hot or coldBathrooms are located past the reception desk on the rightPlease turn OFF your cell phonesPlease complete and return surveys at the end of the seminar

Sunrise, Sunset: Sunrise, Sunset: The Federal Estate Tax is The Federal Estate Tax is

BackBackVictor S. Elgort, Esq.

Kenneth D. Meskin, Esq.Jill Lebowitz, Esq.

Summary of the New Summary of the New Estate, Gift and GST Estate, Gift and GST

Tax LawsTax LawsPresented by: Jill Lebowitz, Esq.

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What’s What’s all the all the Excitement About?Excitement About?

• The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted on December 17, 2010 (the “2010 Tax Act”)

• Federal estate tax is reinstated

• Increased exemption amounts for federal estate, gift and generation-skipping transfer ("GST") taxes

• Historic legislation creates major estate planning opportunities

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Historical Perspective Historical Perspective

• 2001 legislation - The Economic Growth and Tax Relief Reconciliation Act of 2001 - reduced federal estate taxes over the past ten years

• The federal estate tax exemption amount increased from $675,000 in 2001 to $3.5 million in 2009

• The federal estate tax rate was reduced from 55% in 2001 to 45% in 2009

• Estate, gift and GST tax exemption amounts were no longer “unified”

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Historical Perspective Historical Perspective (Continued)(Continued)

• From 2001 to 2009 estate assets received a “step-up” in basis for income tax purposes

• Before the new legislation, the federal estate tax was repealed in 2010 and instead a modified carryover basis treatment applied

• If no legislation had been passed in 2010, then beginning in 2011, the federal estate tax would have been reinstated with a $1 million exemption and the estate tax rate was scheduled to increase to 55%

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2010 Tax Act is Good News 2010 Tax Act is Good News for Taxpayers (at least for for Taxpayers (at least for

two years)two years)• The 2010 Tax Act extends and improves

federal estate, gift and GST tax benefits for 2010 through 2012

• Federal estate tax exemption amount increases and federal estate tax rate decreases

• Effective retroactively from January 1, 2010 through December 31, 2012

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Federal Estate Tax in Federal Estate Tax in 2011 and 20122011 and 2012

• 2011 and 2012 federal estate tax exemption of $5.0 million (indexed beginning in 2012)

• 2011 and 2012 federal estate tax rate is 35%

• Basis step-up continues for estates of decedents dying during 2011 and 2012

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Federal Gift Tax in Federal Gift Tax in 2011 and 20122011 and 2012

• 2011 and 2012 unified federal estate and gift tax exemption amounts

• 2011 and 2012 federal gift tax exemption is $5 million (or $10 million for a married couple electing “gift splitting” or using “Portability”)

• 2011 and 2012 gift tax rate is 35%

• 2011 and 2012 provide incredible opportunities for lifetime transfers

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GST Tax in 2011 and GST Tax in 2011 and 20122012

• GST tax applies to transfers to grandchildren and more remote descendants

• 2011 and 2012 GST tax exemption amount is $5 million (indexed beginning in 2012)

• 2011 and 2012 GST tax rate is 35%

• 2011 and 2012 provide incredible opportunities for generational planning

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Summary of 2011 and Summary of 2011 and 2012 Federal Estate, Gift 2012 Federal Estate, Gift

and and GST Tax LawsGST Tax Laws

• Estate, Gift and GST tax exemption amount is $5 million

• Estate, Gift and GST tax rate of 35%• Exemption amounts indexed for inflation

beginning in 2012 in $10,000 increments• Portability applies

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PortabilityPortability• Surviving spouse can use unused portion of

federal estate tax exemption amount of “last deceased spouse”

• Not as simple as it seems

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Summary of 2010 Federal Summary of 2010 Federal Estate, Gift and GST Tax Estate, Gift and GST Tax

LawsLaws• Gift tax exemption amount $1 million

• Estate tax reinstated - exemption amount $5 million

• Option to elect out of estate tax and instead elect modified carryover basis

• GST tax reinstated - exemption amount $5 million

• Gift and Estate tax rate of 35%

• GST tax rate of 0%

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2010 Estates2010 Estates• General Rule for 2010 estates - $5 million federal

estate tax exemption amount, income tax basis step-up treatment and 35% federal estate tax rate

• Optional Election for 2010 estates - The executor of a 2010 estate may opt out of the federal estate tax and instead elect to have a modified carryover basis apply

• There are a number of factors that should be considered before making this election

• Extension of time to file 2010 federal estate tax returns and pay estate tax until September 19, 2011 for 2010 decedents dying before December 17, 2010

• No extension of time to file state estate tax returns

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State Estate Tax Laws State Estate Tax Laws Remain Unchanged for 2010 Remain Unchanged for 2010

through 2012through 2012• New Jersey estate tax remains unchanged at

$675,000 exemption

• New York estate tax remains unchanged at $1 million exemption

• Pennsylvania estate tax remains at zero for 2011 and 2012 but imposition of Pennsylvania inheritance tax remains unchanged

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Chasing the SunsetChasing the Sunset

• All of the 2010 Tax Act changes will “sunset” and expire at the end of 2012 unless additional legislation is passed.

2013 sunset:

Gift tax exemption amount $1.0 million

Estate tax exemption amount $1.0 million

GST tax exemption amount $1.36 million (indexed from 2011)

Estate, Gift and GST tax rate of 55%

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Chasing the Sunset Chasing the Sunset (Continued)(Continued)

• If no further legislation is passed before 2013, the federal estate tax exemption amount is scheduled to decrease to $1 million and the estate tax rate is scheduled to increase to 55%.

• Take advantage of the opportunities presented by the increased exemption amounts of the 2010 Tax Act while you can!

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Certain Lifetime Wealth Certain Lifetime Wealth Transfer Techniques Still Transfer Techniques Still

AvailableAvailable• Irrevocable Life Insurance Trusts (“ILITs”)

• Grantor Retained Annuity Trusts (“GRATs”)

• Qualified Personal Residence Trusts (“QPRTs”)

• Sales to Intentionally Defective Grantor Trusts (“IDGTs”)

• Valuation Discounts

Portability: What You Portability: What You Need to KnowNeed to Know

Presented by: Victor S. Elgort, Esq.

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Reunification of gift and estate tax exemptions• $5 Million Exemption for Both Gift and Estate Tax

Purposes

Prior outcome without Advance Planning • Simple will leaving all to a surviving spouse

“wastes” exemption• Surviving spouse receives all assets free of tax

under the unlimited marital deduction• But on subsequent death of surviving spouse, only

one exemption will be available

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““Deceased Spousal Unused Deceased Spousal Unused Exclusion Amount”Exclusion Amount”

• The question is not how big predeceased spouse’s estate is, but how big the taxable estate is, after application of marital deduction

• That is why you get the same portability effect whether first deceased spouse has a $50 million estate and leaves it all to surviving spouse, or first spouse dies penniless

• In either case, the estate uses none of the $5 million basic exclusion amount, and it is converted into a Deceased Spousal Unused Exclusion Amount (“DSUEA”) for the surviving spouse

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Portability Planning Portability Planning PointersPointers

• Executor of first deceased spouse must file estate tax return on timely basis, even if no tax was due

• Executor must make an affirmative election to allow the surviving spouse to use the unused exemption

• Statute of limitations will remain open indefinitely, but presumably only to determine the proper amount of unused exemption – Thus, continued exposure to valuation and inclusion issues

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Portability Planning Portability Planning PointersPointers

• No Portability of unused GST exemption• DSUEA can be used by surviving spouse

for subsequent gifting purposes, not just at death

• Surviving spouse uses up her inherited DSUEA before using up her own basic exclusion amount – hedging bets against subsequent possible loss of the DSUEA

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Portability Planning Portability Planning Pointers & QuestionsPointers & Questions

• Complexity and uncertainty abounds• Only applies to “Last Deceased Spouse” • Example: H1 dies (with W as sole

beneficiary) and thus W’s applicable exclusion amount becomes $10 million. If W remarries, and H2 then dies (with no unused exemption of his own), W’s applicable exclusion amount decreases back to $5 million

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• “Privity” Requirement• Surviving spouse who remarries can only pass on

his or her own unused exemption– Not the DSEUA from spouse number 1

• Mere remarriage does not remove right to unused exemption

Example: H1 dies and W’s applicable exclusion amount is now $10 million. If W remarries, and W dies, then her applicable exclusion amount is still $10 million but H2’s applicable exclusion amount is likely only $10 million, not $15 million

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• Incentive to join in opposite-sex civil union to preserve portability?

• Will DSUEA become an issue for prenuptial agreements?

• Perhaps useful if retirement benefits are major asset of the estate


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• Is New Jersey State Slayer Statute Applicable?

• Surviving Spousal Murderer Cannot Inherit Property of Slain Spouse

• So is the DSUEA considered property within the scope of the statute?


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• Sunsets in two years• Applies only when predeceased

spouse dies in 2011 or 2012

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• Credit Shelter Trusts (or Disclaimer Trusts) still recommended and beneficial

• Provides professional investment management and asset protection for surviving spouse

• Shelters intervening growth in asset value and accumulated income from estate tax on second death

• Permits use of predeceased spouse’s GST exemption• Protects expectancy of children from diversion by

surviving spouse• Avoids uncertainties and risks associated with

remarriage or divorce scenarios under new rules

Lifetime Wealth Transfer Lifetime Wealth Transfer OpportunitiesOpportunities


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Immediate Gift PlanningImmediate Gift PlanningOpportunities in 2011Opportunities in 2011

• Annual exclusion gifts – still $13,000 per donee

• Taxable gifts:2010: $1 million lifetime gift exemption in 2010

35% gift tax rate on taxable gifts over $1 million2011: $5 million lifetime gift exemption in 201135% gift tax rate on taxable gifts over $5 million

• Doubled with gift splitting

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Immediate Gift PlanningImmediate Gift PlanningOpportunities in 2011Opportunities in 2011

• Utilize the additional $4 million of gift tax exemption to shelter future growth from estate tax – Identify assets with highest likelihood for appreciation

• Use high-basis assets for these gifts if possible

• Consider incurring a gift tax at the 35% rate for low-basis assets

• Gift tax paid on the gift will increase cost basis in the hands of the donee (up to FMV of the asset gifted)

Lifetime GiftingLifetime GiftingTax Exclusive Nature of Tax Exclusive Nature of

GiftsGifts• Gift tax imposed on the donor is

calculated based on the value of the gift passing to the donee (after the imposition of gift tax)

• Estate tax, on the other hand, is calculated based on the total value of the taxable estate, regardless of the net amount passing to the beneficiaries of the estate

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Lifetime GiftingLifetime GiftingTax Exclusive Nature of Tax Exclusive Nature of

GiftsGifts At Death By Gift

Net Asset Value $1,000,000 $1,000,000• Effective Tax Rate 35.00% 25.93%*• Total Tax $(350,000)

$(259,300)• Savings $ 90,700

*Effective Gift Tax Rate = 35%/135%

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Dynasty TrustDynasty TrustSummary of TechniqueSummary of Technique

• A type of trust which benefits multiple generations where none of the assets held by the trust are included in either the grantor’s taxable estate or any of the beneficiaries’ taxable estates

• However, under the tax law, whenever a transfer is made by the grantor to a “skip person” (e.g. grandchild, great‐grandchild, etc.) or a trust for their benefit (e.g. dynasty trust), a second level of tax is imposed on the transfer (in addition to gift tax)

• Notwithstanding, a grantor is allowed a lifetime GST exemption on the first $5 million of taxable transfers to “skip persons”

• Thus, if the grantor allocates all or a portion of his/her GST exemption to the entire transfer, none of the transfer will be subject to GST tax either in the current year or future years

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Dynasty TrustDynasty TrustOverview of TechniqueOverview of Technique

Dynasty Trust

Discretionary Distributionsto Children for Life

Discretionary Distributions to Grandchildren for Life

Discretionary Distributionsto Great-Grandchildren

for Life

Future Generations

Grantor

Advantages•Creditor protection•Divorce protection•Estate Tax protection•Dispositive plan protection•Spendthrift protection•Consolidation of capital

*Gift should take advantage of any remaining lifetime gift exclusion and lifetime GST exclusion

No transfer tax paid.




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Dynasty TrustDynasty TrustExample – Erosion of Estate at Each Example – Erosion of Estate at Each

Generation LevelGeneration Level

Wealth of Parents $1,000,000 $1,000,000 $1,000,000

Estate Tax Rate 35% 35% 35%

Estate Tax $ 350,000 $ 350,000 $ 350,000

Wealth of Children $ 650,000 $ - $ -


Estate Tax $ 227,500 $ - $ -

Wealth of Grandchildren $ 422,500 $ 650,000 $ -


Estate Tax $ 147,875 $ 227,500 $ -

Wealth of Great-Grandchildren

$ 274,625 $ 422,500 $ 650,000

% of Original Wealth Passing to Great-Grandchildren

27.4625% 42.2500% 65.000%

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Dynasty Trust of $5 millionDynasty Trust of $5 millionExample – Summary of Estate Tax Example – Summary of Estate Tax

Savings Savings 5% Growth

7% Growth 9% Growth

Value of Trust in 20 years

$ 13,266,489

$ 19,348,422

$ 28,022,054

Estate Tax Savings @ 45%

$ 5,969,920

$ 8,706,790

$ 12,609,924


$ 35,199,944

$ 74,872,289

$ 74,872,289


$ 15,839,975

$ 33,692,530

$ 33,692,530


$ 93,395,929

$ 289,732,134

$ 880,156,460


$ 42,028,168

$ 130,379,460

$ 396,070,407


$ 247,807,205

$ 1,121,171,938

$ 4,932,758,341


$ 111,513,242

$ 504,527,372

$ 2,219,741,253

Generation-Skipping Generation-Skipping Transfer Tax After the Transfer Tax After the

2010 Tax Act2010 Tax ActPresented by: Jill Lebowitz, Esq.

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GST Tax After the 2010 GST Tax After the 2010 ActAct

• Reinstatement of the GST Tax

• GST tax exemption amounts and rates:

-2010 GST tax exemption amount was $5.0 million

-2010 GST tax rate was 0%

-2011 and 2012 GST tax exemption amount is $5.0 million (indexed beginning in 2012)

-2011 and 2012 GST tax rate is 35%

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GST Tax Exemption GST Tax Exemption AllocationAllocation

• GST protected dynasty trusts

• Automatic allocation of GST tax exemption

• Insurance trusts – GST tax exemption allocation issues

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GST Tax Allocation GST Tax Allocation ReportingReporting

• U. S. Gift (and Generation-Skipping Transfer) Tax Return Issues

- Report allocation of your GST exemption to a GST protected trust or a direct skip gift

- One time election to opt out of the automatic allocation of your GST exemption to transfers to an insurance trust for that year and all future years

- 2010 direct skip gifts - elect out of the automatic allocation of your GST exemption to the transfer - Form 709 Filing Deadlines and Extensions

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GST Tax Planning GST Tax Planning OpportunitiesOpportunities

• Increased GST and gift tax exemption amounts during 2011 and 2012 provide historic opportunities for generational estate planning

Formula Clauses: Formula Clauses: Does Your Will Say What Does Your Will Say What

You Think It Does?You Think It Does? Presented by: Kenneth D. Meskin,

Esq.

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Use of Formula Bequests Use of Formula Bequests After the 2010 Tax ActAfter the 2010 Tax Act

• Impact of the 2010 Tax Act on pre-existing formula bequests

• Need to understand impact of formula on the plan for distributing assets

• State law issues of interpretation

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• Bequest of federal estate tax exemption amount to “bypass” trust

• Use of a dollar amount or percentage limitation in appropriate situation

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• Bequest of state estate tax exemption amount to “bypass” trust

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• Use of “disclaimer” trust

• Maximum flexibility

• Practical issues in implementing

Existing Opportunities Existing Opportunities Survive: ILITs, GRATs, Survive: ILITs, GRATs, QPRTs and Intrafamily QPRTs and Intrafamily

LoansLoansPresented by: Kenneth D. Meskin,

Esq.

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Existing Estate Planning Existing Estate Planning Tools Survive the 2010 Tax Tools Survive the 2010 Tax

ActAct• Life Insurance trusts remain a key

planning tool• Increased exemptions provide

additional opportunities

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ActAct• Reports of the death of zeroed out

Grantor Retained Annuity Trusts (GRATs) are significantly overstated

• Technique for removing from taxable estate income/appreciation on investment assets in excess of IRS assumed rate

• February 2011 applicable federal rate is 2.8%

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ActAct• Qualified Personal Residence Trusts

(QPRTs)• Increased availability in light of

enhanced gift tax exemption and reduced fair market value of residential real estate

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ActAct• Intrafamily Loans – taking advantage of

low interest rate environment• February 2011 mid term rate is 2.33%

Existing Opportunities Existing Opportunities Survive: Sales to Grantor Survive: Sales to Grantor

Trusts and Valuation Trusts and Valuation DiscountsDiscounts


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Installment Sale to an IDGTInstallment Sale to an IDGTCurrent Interest Rates – Current Interest Rates –

February 2011February 2011Short-Term AFR (3 years or less) .51%

Mid-Term AFR (over 3 years, up to 9 years)

2.33%

Long-Term AFR (over 9 years) 4.15%

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Intentionally Defective Grantor Intentionally Defective Grantor Trust (IDGT) Trust (IDGT)

An IDGT is a type of trust where all income earned by the trust is taxed to the grantor because the trust is considered incomplete (“defective”) for income tax purposes, but completed for estate and gift tax purposes

Defective nature of trust also allows for a “tax-free” gift to the trust’s beneficiaries when grantor pays income taxes otherwise attributable to the trust or its beneficiaries

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Installment Sales to an IDGTInstallment Sales to an IDGTSummary of Technique Summary of Technique

• A type of transaction whereby a grantor sells a highly-appreciating asset to an IDGT in exchange for an installment note– Note, however, that the grantor should generally make an initial gift

(at least 10% of the total transfer value) to the trust so that it has sufficient capital to make its payments to the grantor

• To the extent that the growth rate on the assets sold to the IDGT is greater than the interest rate on the installment note taken back by the grantor, the “excess” is passed on to the trust beneficiaries free of any gift, estate and/or GST tax

• No capital gains tax is due on the installment sale to the trust because the trust is “defective” for income tax purposes

• Interest income on installment note is not taxable to the grantor because the trust is “defective” for income tax purposes

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Installment Sales to an IDGT Installment Sales to an IDGT Overview of TechniqueOverview of Technique

Grantor IDGT

Children,Grandchildren,

Great Grandchildren& Future Generations

Gift & sale of highly-appreciating assets

Installment note(s)

Discretionary distributions of income and principal during the lifetime of the trust’s beneficiaries

Assets outside of the taxable estates of beneficiaries

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Installment Sale to an IDGTInstallment Sale to an IDGTExampleExampleAssumptions

FMV of Assets Sold to IDGT $ 1,111,100

Gift to Trust $111,100

Interest Rate (Mid-Term AFR) 2.33%

Terms (Years) 9

Payment Structure $111,100 Down Payment with Gift, Balance Interest-Only w/Balloon Payment

Payment Period Annually

Timing of Payments End of Period

Year Beginning Balance

Income10.00%

Installment Payment

Ending Balance

1 $1,000,000 $100,000 $ (23,300) $1,076,700

2 $1,076,700 $107,670 $ (23,300) $1,161,070

3 $1,161,070 $116,107 $ (23,300) $1,253,877

4 $1,253,877 $125,388 $ (23,300) $1,355,965

5 $1,355,965 $135,596 $ (23,300) $1,468,261

6 $1,468,261 $146,826 $ (23,300) $1,591,787

7 $1,591,787 $159,179 $ (23,300) $1,727,666

8 $1,727,666 $172,767 $ (23,300) $1,877,133

9 $1,877,133 $187,713 $ (1,023,300) $1,041,546

Amount passing to beneficiaries free of estate and gift tax

And income tax on trust income is paid by grantor as additional “gift” without gift tax

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Leveraging Transfers Leveraging Transfers Through Valuation Through Valuation

Discounts Discounts • If the value of the transferred assets can be

discounted by application of well-established factors, the amount of assets that can be transferred via the increased exemption amount is substantially expanded

• Common discount factors include lack of marketability, lack of control, restrictions on subsequent transfers, and estimated income tax liability on “built-in gains”

• Despite repeated threats of “loophole closing,” discounts withstand the siege

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Common Vehicles to Qualify Common Vehicles to Qualify for a Discounted Transfer for a Discounted Transfer

• Transfers of undivided partial interests in real estate

• Transfers of a partial interest in a family business

• Transfers of a partial interest in a family holding company, such as an LLC holding investment assets or a co-owned family asset, such as a vacation home

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Illustration of the Power of Illustration of the Power of Valuation Discounts Valuation Discounts

• In the recent case of Estate of Stewart, decided in 2010 by the US Federal Court of Appeals (Second Circuit), the IRS and the taxpayer both agreed to accept a total valuation discount of 42.5% both for the lifetime gift of a 49% partial interest as well as the remaining 51% interest retained by the donor at her death

• Commonly, all or nothing?• Need for sound factual support and appraisal of

fractional interest, as well as underlying asset

Question & Answer Question & Answer SessionSessionThank you for coming!

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that unless specifically provided otherwise in this communication (including any attachments), any U.S. federal tax advice contained in this communication (including any attachments) does not constitute a ”reliance opinion” as defined in IRS Circular 230 and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter addressed herein.

sunrise, sunset: the federal estate tax is back

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