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2010 is the year to reduce your estate by gifting. 2011 marks the return of the estate tax at the levels of the prior decade. Estates that exceed $1 million in value will be taxed at rates as high as 55 percent. If your estate exceeds the amount that you and your spouse need for comfortable retirement, it would be wise to consider making substantial gifts to your heirs prior to the end of 2010.
If you make gifts in excess of $1 million (including any taxable gifts from prior years), the gift tax rate for 2010 is 35 percent. This is significantly lower than the estate tax for future years.
If your estate includes business property or real estate, you should consider gifting these assets via a family limited partnership or similar structure. Such gifting provides the benefit of retaining family control as well as the potential for making these gifts at discounted values.
Estate Planning for 2010: Most taxpayers are aware of the temporary estate tax repeal that applies to 2010. However, repeal doesn't necessarily mean that taxes will be lowered for heirs of a decedent dying in 2010. That's because, estate tax repeal includes changes to the income tax basis rules for property acquired from a decedent. As a result of these income tax changes, some heirs could face higher combined estate and income tax costs if their loved one dies in 2010 than would have been the case if death had occurred in 2009.
Another concern is that wills and trusts using formula clauses that work well when the estate tax is in force may produce unintended tax consequences when there is no estate tax—such clauses could be construed to leave spouses with far less than the decedent intended, and in some cases, even nothing, as shown in the simplified example that follows.
Illustration: An individual has a $6.5 million estate. His will leaves the “exempt amount” (stated as a formula) to his children and the balance to his spouse. Had he died in 2009, the children would have received $3.5 and his spouse would have received $3 million. The marital deduction coupled with unified credit, which sheltered $3.5 million for 2009 transfers, would have prevented any estate tax from being owed. Now assume he dies in 2010. The formula clause could be interpreted as giving everything to the children and nothing to his spouse.
There is also concern that these formula clauses could operate to increase state death taxes. Returning to the foregoing illustration, the amount that could be construed as going to the children could exceed the state exemption in those states that impose death taxes.
Fortunately, some states (including Virginia) already have begun to tackle this issue. They have started the process of enacting laws that would provide that a formula for calculating transfers or devises based on federal estate or generation-skipping transfer tax law contained in a will or trust of a decedent who dies after Dec. 31, 2009, and before Jan. 1, 2011, will be construed to refer to the tax law applicable on Dec. 31, 2009.
Estate planning is not just about taxes...take care about the distribution of your assets. Planning ahead and making wise choices about your trustees and/or executors can alleviate emotional and financial distress for your loved ones.
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