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Articles Posted in Estate Tax

The current estate tax laws are likely to revert to pre-EXTRA levels beginning on January 1, 2013. This means that the estate taxes will be levied at estates over $1,000,000 with a tax rate of up to 55%. Considering the value of real property, life insurance and retirement accounts many individuals may find themselves included in the estate tax bracket. However, 2012 has historically low tax rates and historically high exemptions which allows for creative and unique planning before January 1, 2013.


The current lifetime gift exemption is $5,000,000. The annual exclusion amount is currently at $13,000 but an individual can give up to $5,000,000 during life tax free. This gift exemption is scheduled to go back to $1,000,000 as well in 2013. Therefore, 2012 is a great year for making lifetime gifts.

The tax law changes enacted in 2010 under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act made significant changes to estate and gift tax laws for 2011 and 2012. However, these changes will expire at year’s end barring an act from our legislators on Capitol Hill. Estate planning attorneys and their clients find themselves in the same predicament they experienced at the end of 2010. Back then, it appeared that exemption amounts would decrease to pre-2000 levels beginning on January 1, 2011. Again, if Congress fails to act (and because this is a presidential election year such a fear is warranted) the estate and gift tax world will resemble that of 1999.

Important Changes for 2013

The estate and gift tax exemption is $5,120,000 for 2012, but will decrease to $1,000,000 in 2013.


The GST tax is currently $5,120,000 but will decrease to approximately $1,390,000 in 2013
Estate, gift and GST tax rates are capped at 35% in 2012 but will increase to 55% in 2013
Estate tax exemptions were made portable in 2011-2012. This means that one spouse can port his or her unused exemption amounts to the other spouse on the first spouse’s death. This portability option will expire in 2013.

The uncertainty of the next six months is a valuable time for creative estate planning and gifting opportunities. Many clients with substantial wealth may find outright gifts very attractive. They can transfer some of their wealth during life and enjoy the lower tax rates and higher exemption amounts available for 2012. Additionally, many estate plans should be reviewed to ensure that there are no unintended tax consequences under the new law.
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Some states are better than others for decedents dying in the year 2012. Although California boasts a relatively high income and sales tax, it is actually a great place to die for tax purposes. As a way of background, it is important to understand some different terms. An estate tax is a tax paid by the estate of a decedent. An inheritance tax is paid by heirs who receive a distribution from an estate. The Federal estate tax exemption is currently set at $5 million indexed for inflation. There is no federal inheritance tax.

The California estate tax was phased out in 2005 and heirs have not paid an inheritance tax since 1982. However, Washington D.C. and 22 other states do impose an inheritance or state estate tax. Most of the states that impose the estate tax exempt around $1 million per estate with the highest tax rate at 16%. Kentucky and five other states impose only an inheritance tax. Pennsylvania, for example, imposes an inheritance tax of 4.5%-15% on money left to anyone other than a spouse. New Jersey and Maryland impose both taxes. New Jersey imposes an estate tax of up to 16% with the lowest state estate exemption of $675,000. New Jersey also imposes an inheritance tax from 11-16% on money left to nieces, nephews or friends but no inheritance tax on money left to parents, siblings, children or grandchildren.

Coinciding with federal changes in estate tax law, many states revamped their laws regarding estate taxes in 2011. Ohio abolished their estate tax effective January 1, 2013 while Illinois brought back its estate tax for decedents dying in 2011 and after. Connecticut lowered the exemption amount from $3.5 million to $2 million per estate. North Carolina, Rhode Island, Vermont and Maine all raised their exemption amounts.

Estate taxes continue to raise numerous questions and concerns for families today. However, California residents have far less concerns since we have a more favorable tax system for decedent estates.
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The IRS released the final version of Form 8939: Allocation of Increase in Basis for Property Acquired from a Decedent. This is the form necessary to elect out of estate taxes for decedents who died in 2010. The form was originally due November 15, 2011 but because of delays and ambiguities in the form it is now due January 17, 2012. The IRS released Notice 2011-76 setting the new deadline and giving some guidance on the form’s application.

Even though the thought of paying no estate taxes seems like a great idea, personal representatives and trustees need to meet with their attorneys and CPAs before making this election. The increase in basis of assets held by a decedent may not actually outweigh the benefit of paying no estate taxes. For more information on this form and its implications check out our previous article here.

After a long-awaited delay, the IRS finally issued some guidance on August 5, 2011 with respect to the filing of the new Form 8939. Notice 2011-66 describes how administrators can opt-of estate taxes for decedents who died in 2010 using Form 8939. Revenue Procedure 2011-41 outlines the tax rules that apply to these “opted out” estates.

Last December, Congress finally approved a new law on estate taxes. This law set the exemption at $5,000,000 and the tax rate at 35%. The law was also made retroactive to January 1, 2010 but allowed for an intriguing twist. If someone died in 2010, the administrator had two choices. They could operate under the old law where there were no estate taxes. Or, they could use the tax rules of the new law. Opting out of estate taxes has a potential disadvantage of also opting out of stepped-up basis rules and opting into modified carryover basis rules. However, opting out also means no estate tax is due no matter how large the estate.

To elect to use the old 2010 provisions with no estate tax, administrators must file the new Form 8939 no later than November 15, 2011. The IRS will not grant extensions to file this form and will only accept late-filed forms under very limited circumstances. To elect to use the new tax laws for 2010 decedents, administrators must file the traditional Estate Tax Return Form 706 by September 19, 2011.

The IRS believes that “7,000 executors of estate who died in 2010 will… [opt out of estate taxes] and thus will be required to file Form 8939, and that it will take approximately 8 hours to prepare.” Although Form 8939 is due in three months, as of August 10, 2011, the IRS has yet to release the final form or any instructions.
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Many Coachella Valley residents have revocable trusts which include a provision for a “bypass trust” otherwise known as an “A/B split trust.” Some residents are considering amending or restating their trusts to remove this provision. Although this may seem wise, there are numerous reasons why these provisions are still important today.

Under the old estate tax laws, every individual had an exemption amount of $3,500,000 but married couples also enjoyed an unlimited marital deduction. Therefore, if Warren Buffet wanted to give his entire estate to his Spouse, no estate tax would be due until her death. Unfortunately, he would have lost his personal estate tax exemption and higher estate taxes would be paid upon the Spouse’s death. However, if Mr. Buffet funded a bypass trust with his personal exemption amount ($3,500,000 in 2009) then this amount would still be available for the wife to use for her health, education, support and maintenance AND it would be exempt from estate taxes. In this scenario, Warren Buffet’s wife saved $1,575,000 in estate taxes that would otherwise have been paid to the US Treasury upon her death.

In December 2010, a new law was passed and the estate tax exemption was raised to $5,000,000. Additionally, the exemption is “portable” to Surviving Spouses so even if the first spouse doesn’t use up the whole $5,000,000 the unused portion is passed onto the Surviving Spouse. Thus, a Surviving Spouse can effectively have an exemption amount in excess of $5,000,000. With these higher exemption amounts and the option to “port” any unused exemption, why would you still need a bypass trust?

There are many reasons why bypass trusts are still important tools in most estate plans. First, the new estate tax laws are temporary. They are scheduled to expire in 2013 along with the $5,000,000 exemption and the notion of portability. The exemption amount will fall to $1,000,000 on January 1, 2013. Second, bypass trusts remain excellent mechanisms for ensuring where some money eventually gets distributed. Although Surviving Spouses have access to the funds in a “bypass trust” they cannot change who the ultimate beneficiaries are, nor can they frivolously or lavishly spend down these funds. Third, under most circumstances the bypass trust is a great way to protect assets for the children of one Spouse when there is a second marriage. Fourth, assets in a bypass trust cannot be reached by creditors of a Surviving Spouse.

Although getting rid of that bypass trust provision may seem like a good way to simplify your estate plan, prudent estate planning attorneys would advise keeping this provision until more permanent estate tax laws are in place.
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For family members, lawyers and accountants of heirs of decedents dying in 2010, there is some relief from the IRS regarding filing requirements. On March 31, 2011 the IRS issued a statement explaining that the new Form 8939 will not be due on April 18, 2011. Instead, the form will be due in the near future but would allow for reasonable time for administrators of estates to prepare and file the form. Currently, there is no final version of Form 8939 available for administrators to use and previous statements from the IRS have indicated that the form will be due 90 days after the final version is released.

Form 8939 allows administrators of estates to opt-out of estate taxes. Since the United States has effectively had some form of estate taxes since the late 1790s, this comes as a foreign concept to many accountants and lawyers. The new form allows administrators to allocate basis of property acquired from a decedent for income tax purposes. Additionally, because it is an “opt-out” process, certain estates may choose to “opt-in” to the current estate tax laws. The current laws allow an exemption of $5 million and thus it is only estates valued at over that amount that would benefit from the “opt-out” procedure.
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An interesting piece by Lewis Saret in Forbes outlines the Treasury Department’s estate tax proposals for 2013. Coachella Valley residents should take note of these proposals since they are significantly different from our current laws expiring in 2012. Notably, the proposals include:

-Bringing back 2009 levels for estate, gift and generation-skipping transfer (GST) taxes -Requiring a minimum ten-year term on GRATS -Permanently allowing “portability”

Estate/Gift Taxes
For 2011 and 2012, the gift and estate tax exemption amount is $5 million and the tax rate is 35 percent. The proposals suggest returning to 2009 levels which included a $3.5 million exemption for estate taxes, $1 million exemption for gift taxes and a maximum tax rate of 45 percent. Although this change will likely face considerable difficulty in Congress, sophisticated estate planning attorneys should nonetheless take these proposals into consideration when drafting new estate plans.

Grantor retained annuity trusts (GRAT) are a common technique loved by attorneys and clients alike to transfer wealth free from estate and gift taxes. An important requirement is that the grantor must survive the term of the GRAT. This has traditionally been overcome by the use of very short term GRATs (usually three years). However, the new proposal would mandate that all GRATs have a minimum term of 10 years.

Portability is the notion that a surviving spouse can use their predeceased spouse’s unused gift or estate tax exemption in addition to their own. Effectively this gives surviving spouses much greater exemption amounts upon their death. The current laws allow for portability but this technique is set to expire at the end of 2012.
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