San Diego Estate Planning Attorney

For many years, each person (married or single) could give away a certain amount of his or her wealth free of estate or gift taxes.  This amount is popularly known as the Unified Credit Amount.  Traditional estate planning for married couples involved setting up an “AB Trust”.  This was necessary to take advantage of the Unified Credit Amount of both spouses, rather than just one, the net result being that the amount of wealth that could be passed tax-free from the married couple to their beneficiaries was doubled.  Additionally, the basis of assets included in a decedent’s estate were stepped up to the fair market value on the date of death, thereby eliminating the potential capital gains tax on pre-mortem appreciation.

In 2001, Congress modified the Unified Credit Amount by increasing it over the next several years from $1.0 million per person in 2001 to $3.5 million per person in 2009.  There was no estate tax on persons dying in 2010 and, except to a limited extent, no step up in basis either.  In 2011, the Unified Credit Amount reverted to its 2001 levels.  In addition, the 2001 legislation gradually dropped the estate tax rates from 55% to 45%.  The 2001 legislation also made changes to the gift tax law.  While the Unified Credit Amount increased for estate tax purposes, it was capped at $1.0 million for gift tax purposes, although the gift tax rate was further reduced to 35%.  As a result of the “repeal” of the estate tax for persons dying in 2010, a great deal of uncertainty was created, making effective estate tax planning difficult if not impossible.

In January 2011, Congress finally dealt with the uncertainty in the estate and gift tax law, at least temporarily.  The principal changes are as follows:

1.         The new law was made effective retroactively to January 1, 2010.  However, estates of persons dying in 2010 can elect to be treated (and taxed) under the new law (possible estate tax but basis step-up is given), or under the 2001 law (no estate tax and no basis step-up).  Logic dictates, therefore, that if a single person died in 2010 and his or her estate had a net value of $3.5 million or less (assuming no lifetime taxable gifts), his or her estate would want the 2011 law to apply.  The reason for this is that there will be no estate tax, but the basis of the assets will step-up to fair market value, thereby reducing or eliminating capital gains tax on the subsequent sale of the assets.  A married couple with an estate of $7.0 million or less (assuming it is owned by them equally) dying in 2010 would similarly want the 2011 law to apply.  Estates substantially in excess of the Unified Credit Amount would presumably elect to have the 2010 law apply because there would be no immediate estate tax and any capital gains tax resulting from the lack of a basis step-up would be deferred until the assets were sold; and, the capital gains tax rate would be less than the estate tax rate, the difference being tax permanently avoided.

2.         Under the new law, the Unified Credit Amount was increased to $5.0 million per person and the tax rate was reduced to 35%.  The new Unified Credit Amount and tax rate applies both for estate tax and gift tax purposes.  They also applies for generation skipping transfer tax purposes.

3.         The 2011 law introduced a new concept called “Portability” of the Unified Credit Amount. What this means is that each spouse can transfer his or her unused Unified Credit Amount to his or her spouse.  This eliminates (at least for tax purposes) the need for an AB Trust.  As a result, the first spouse to die can leave his or her estate outright to his or her surviving spouse.  As a practical matter, however, this works only in the case of a single, long-term marriage, with a common set of children or other beneficiaries.  To get the benefit of the Portability, the representative of the deceased spouse’s estate must make an election.  Interestingly enough, Portability does not apply for generation skipping transfer tax purposes.  So, persons who want to leave their estates to grandchildren or more remote beneficiaries will need to retain the AB Trust structure so as to minimize GST tax and maximize GST tax exemptions.

4.         Unfortunately, Congress made the 2011 law effective only until December 31, 2012.  On January 1, 2013, the 2011 law expires and the rules that existed before the 2001 legislation are automatically reinstated–unless, of course, Congress takes further action at that time.  As a result of this uncertainty, the estate plan documents for married couples (with long-term marriages and single set of beneficiaries) should be modified to provide that if death occurs before 2013 and if the Portability election is made, the deceased spouse’s estate passes outright to the surviving spouse (assuming no GST tax issues are present); and if death occurs after 2012 and assuming Portability is no longer available, then the deceased spouse’s estate passes to Trust “B” to the extent of the deceased spouse’s Unified Credit Amount.

This news blog is brought to you by Michael B. Furman, San Diego Estate Planning Attorney.

California Estate Planning Attorney, Michael B. Furman has extensive experience providing Estate Planning to clients throughout San Diego and Southern California.  If you need assistance or know of someone that needs Estate Planning please call Michael B. Furman for a free consultation at: (858) 592-9493.