Category Archives: Estate Planning Taxes

January 2012 Five Federal Estate Tax Observations

January 2012 Five Federal Estate Tax Observations 

  1. The 2012 exemption from federal estate taxes is $5.12 million per person, up $120,000 from 2011. That number will fall to $1 million on January 1, 2013 unless legislation is passed by congress and signed by the president prior to that date.
  2. The past decade of uncertainty over the direction of the federal estate tax exemption has resulted in a lack of consensus among estate planners regarding what’s next. I do not know the answer, but my goal continues to be assisting families with the big picture, using tried and true techniques, without the need for contortions.
  3. Few serious estate planning professionals are relying upon the existence of federal estate tax exemption “portability” as a means to minimize estate taxes, except as a last-ditch post mortem effort to save the exemption of a first-to-die spouse who has not planned. I listened to one continuing legal education lecturer who ridiculed it as “portapotibility.”
  4. This may be a great time for wealthy people to make family gifts of million of dollars, especially to multiple generations. There is risk of a future “clawback” of the gift back into the future estate that should be considered, but even if that occurs, all appreciation will be removed from the grantor’s estate, who also gets to see the beneficiaries enjoy the assets while still living.
  5. If you are considering a grantor retained annuity trust (GRAT) to make an irrevocable gift of an asset’s future appreciation, this is a good time to act. Proposals have been made that may eliminate the technique of using short term GRATs and those that “zero out.”


By Estate Planning Attorney – Eric Matlin

The Middle Class Tax Relief Act (the “2010 Tax Relief Act”), signed by President Obama on December 17, 2010 (two weeks before a re-set of the federal estate tax exclusion to $1 million per person) threw the classic use of shelter trusts into turmoil by introducing “portability” into the equation.
Portability of unused transfer tax exemption is completely new, though it has been discussed for years. Legally married couples who are of different genders will not have to divide their estates in order to shelter assets from estate taxes because any unused estate tax, GST exemption and lifetime gift amount of the first-to-die spouse is added to the surviving spouse’s unified exemptions.
For the very wealthy, it provides spectacular opportunities to make gifts, potentially in perpetuity, utilizing various retained interests trusts and estate freeze vehicles.
For people who are simply affluent, though portability may make the division of some married couple’s assets for estate tax planning unnecessary, it spawns a few other considerations:
• It requires the filing of an estate tax return upon the first spouse’s death that is purely informational. The value of the first spouse’s estate is left open on his/her return until the second spouse dies. Upon the survivor’s death, if his/her estate exceeds the exclusion amount existing at that time, then the excess is used to fill up the first-to-die spouse’s exclusion amount (as it existed back then?) before the survivor’s estate is taxed.
• If it turns out that the survivor’s estate is below the exclusion amount, then the legal/accounting fees spent on the first death was a waste of time and money.
• With the estate tax laws constantly changing, is it worth the effort to file a return on the first death that might ultimately not otherwise be necessary?
• It only applies to most recent spouse’s unused credit, so if the survivor remarries, that also renders the first informational return a waste.
• Like all of the provisions of the 2010 Tax Relief Act, it is applicable only for the years 2011 and 2012.
• It does not work for gay and lesbian married couples, as their marriages are not federally recognized. Then again, the unlimited marital deduction does not work for them for the same reason.

1/1/11: The Estate Tax Deal

The world of estate planning has had a chaotic year throughout 2010 because of the shifting sands of the estate tax. Over recent months, the lurking date of January 1, 2011 caused some hysteria in estate planning circles reminiscent of Y2K. Just like that moment turned out to be a non-occurrence of the Al Capone vault variety, this one is shaping up as somewhat anti-climactic as well.

Last week, a new tax bill finally passed both chambers of Congress and was signed into law by President Obama on Friday December 17.

A brief review of the strange recent history of estate tax:

2009: Last year, in Aught 9, estates worth less than $3.5 million estates were exempt from federal estate taxes. At the time that was the highest exemption in the history of a tax that has continually been part of the Internal Revenue Code since 1916. The highest rate was 45%.

2010: This year, the estate tax disappeared. By picking a spectacular year to die, Dan Duncan’s family saved quite a few dollars on his $9 billion dollar estate, as did George Steinbrenner’s on his $1 billion estate. Elsewhere electrical plugs are in readiness to be pulled in the coming days. Suicide, assisted or otherwise, may still loom for the uber-wealthy, because…

In 2011, federal estate taxes return, though not with the vengeance that would have ripped into many middle class estates had the Washington power structure not reached a last minute deal. The estate tax, dead all of this year, will return to life like a zombie on New Year’s Day, but at a higher exemption/lower top rate than ever before. The exemption, through 2012, will be $5 million per person, affecting only the top ¼ of 1% of wealthy Americans. The top rate will be 35%.

Without the December political compromise (or capitulation, depending upon your viewpoint) all estates greater than $1 million for people dying on or after 1/1/11 could have faced taxes as high as 55%. As it is, the estate tax moment of trust has simply been delayed for two years.

I would say to the wealthy people who followed their planners’ advice and made gifts in excess of their lifetime exclusion of $1 million (“because the top bracket is never going to be this low again”): though you have to write an IRS check this coming April, and if you gifted appreciated assets your heirs may have to pay a higher capital gain someday than they otherwise would have, take solace in the fact that all growth in the amount you divested will, in fact, take place outside of your estate. It is possible that eventually your estate will save taxes overall, especially if the gift was made to grandchildren.

State estate taxes will also return to many states on 1/1/11. In Illinois, the exemption threshold will probably, though not necessarily, be the same as the 2009 level, $2 million per person. This could mean that, without the proper “Q-Tip” language in a shelter trust (or the ability to use a disclaimer to effectuate the equivalent of a Q-Tip trust), over the next two years a fully funded shelter trust of $5 million for a first-to-die spouse who is an Illinois resident will result in the surviving spouse paying a state estate tax in excess of $350,000. Granted that the Illinois estate tax bracket, for estates in that range is between 8% and 12%, far less than the prospective federal rate of those same assets with appreciation added in, but writing checks to pay taxes sooner rather than later is generally not a very appealing prospect.

Between now and 2013, there will continue to be debate on the whole range of tax issues. President Obama will then either begin his second term in office with a new public mandate or he won’t. There is no doubt that the newest estate tax is a direct manifestation of the midterm election’s national lurch rightward, for better or worse. What happens with estate taxes in 2013 and thereafter is anyone’s guess, but without a new law prior to that, the reset goes back to the $1 million per person exemption and 55% top bracket.

A few other points in the new estate tax law:

*The 2010 capital gains treatment on basis step-up can result in greater taxes than the estate tax would have been had it not disappeared. the new tax agreement provides that these 2010 estates, usually worth somewhere between about $1.3 million and about $4 million, will be given an election to pay the lesser tax, whichever one that may be.

*The GST tax exemption will continue to be equal to the transfer tax exemption in 2011-2012, as it has for the past decade. This allows families to push more money into future generations without the punitive generation skipping tax being assessed.

*The estate tax exemption will be “portable” in 2011-2012, so that any unused exclusion following the death of the first-to-die spouse will be added to the surviving spouse’s exclusion by an election made in the federal estate tax form 706 of the first-to-die spouse. The complicating feature of portability is the reality of the multiple divorce and marriage cycle, though in its final form, a surviving spouse can only use the most recent spouse’s unused credit. This provision may make the division of some married couple’s assets for estate tax planning unnecessary.

*The lifetime gift exemption in 2011-2012 will be raised from $1 million to equal the applicable exclusion amount of $5 million for the next two years. This is a similarity to the old “unified” estate and gift exemption that existed prior to the 2001 Tax Act.

*Inflation adjusters are built into the exclusion amount, with increments being rounded to the nearest $10,000 per year. This is only important for one year, 2012, and only then if there is much inflation in 2011.

Estate Tax Cynicism-Thank you Paul Krugman


After years of speculation about what is going to happen to estate taxes—they disappeared this year but come roaring back next year at a low threshold if nothing is done soon in the U.S. Congress, an opinion piece in the N.Y. Times by Paul Krugman caught my eye.

 Mr. Krugman reports that Republican Senator Jon Kyl recently said that he would block a bill extending unemployment benefits and health insurance subsidies for the jobless for the rest of the year unless a new agreement can be reached on the estate tax. It reminds me of the time that a 2006 bill raising the minimum wage was packaged with permanent estate-tax elimination by now-retired Republican Senator William Frist.

 The House has already passed a bill that continues to exempt the assets of couples up to $7 million, leaving 99.75 percent of estates tax-free. Apparently that is not enough for Mr. Kyl, who seems willing to hold up desperately needed aid to the unemployed on behalf of the remaining 0.25 percent of the wealthiest Americans among us.

Estate Taxes—A Good Year to Die? Planning for Multiple Uncertainties.

If you are a high net-worth individual, this is a good year to die, at least from the vantage point of your heirs. I hope that you have no reason to watch your back, but it is just one more thing to think about.

The estate tax is dead for one year, at least for now. I, along with the vast majority of people involved in estate planning, had believed since 2001 that the unsettled estate tax situation would be resolved prior to the end of 2009, but health care and other pressing concerns ate up Congress’ legislative agenda. We are now living in an estate-tax-free year. Neither the federal government nor the State of Illinois currently tax estates.

Next up, at least in terms of years, is 2011, when the “sunset” provision that is part of the law that created this mess resurrects the estate tax at a much lower level than in 2009, when individuals worth less than $3.5 million ($2 million for the Illinois estate tax)—double those numbers for a married couple whose estate is properly structured—were not taxed. If nothing is done regarding this issue, the threshold for taxes will be re-set next year at $1 million per person ($2 million for Illinois). How did we get into this mess?

In 1906, President Theodore Roosevelt first proposed a federal tax on inheritances, saying that a “man of great wealth owes a particular obligation to the State, because he derives special advantages from the mere existence of government.” Flash forward to 2001, when there was a federal budget surplus and the Bush administration was in full tax-cutting mode. President Bush sought federal estate tax repeal and managed to accomplish it, but only for one year, 2010. Embedded in the 2001 Tax Act is the sunset provision whereby estate tax laws after 2010 automatically revert to what they would have been if there had never been a 2001 Tax Act—an exclusion of $1 million for federal estate taxes and 55% top rate (plus a 5% surtax on estates valued between $10 million and $17.184 million).

If nothing is done in Congress prior to the end of this year, the 2011 federal estate tax will hit the middle class hard. Even if your only large asset is a term insurance policy of $1 million, your estate could be taxed.

Since nobody knows the future legislative direction on this issue, 2010 planners must provide for multiple uncertain possibilities:

  • No 2010 estate tax.
  • A $1 million exemption for 2011 and beyond, with a 55% top rate (and the 5% surtax).
  • The exemption to be set in the future somewhere between $2 million and $5 million with top rates between 15% (equivalent to the highest capital gain rate) and 45% (last year’s rate).
  • The possibility of a new law, if there is one this year, to be applied retroactively to January 1, 2010. If this happens, look for a court battle, ending up in the Supreme Court, to supplement any legislative battles.
  • There is currently no stepped-up basis in 2010 for appreciated assets. In prior years, the stepped-up basis made an heir’s cost basis equal to the value of the asset at the date of the grantor’s death–or, alternatively, six months later–rather than its original cost. In 2010 only, the heir of an appreciated asset takes a carryover basis and there is no step-up. This means that capital gains tax will be paid on all appreciation that occurred since the purchase of the asset, potentially hitting the heirs of estates that would not have had to pay estate taxes if the 2009 law had been kept in place.


If Congress does not act prior the end of 2010, keep an eye on a spike in deaths among the spectacularly wealthy, especially in the last quarter of the year.

There are many reasons to plan your estate that have nothing to do with estate taxes. If you have not met with your estate-planning lawyer within the last few years, consider whether your powers of attorney are up-to-date, whether circumstances have changed and whether your planning has the depth to withstand various contingencies that life can bring.

From Teddy Roosevelt to Barack Obama

Yesterday, President Obama talking about health care reform cited Teddy Roosevelt as a present who recognized its need early in the last century. In 1906, Roosevelt first proposed a federal tax on inheritances, he said that a “man of great wealth owes a particular obligation to the State, because he derives special advantages from the mere existence of government.” Flash forward more than 100 years. There is currently no estate tax, but if Congress does not act prior to 2011, estates greater than $1 million will be subject to estate tax. Anyone with insurance of more than $1 million, which includes hundreds of thousands of Americans, if not millions of us, will be affected.

 There will be an estate tax, but whether 2010 will be a “throw momma from the train” year” remains to be seen. With health care still unresolved and other major issues such as job creation looming, fixing the estate tax is not a major priority in Washington. Nobody knows where this is going. It will either rise from the dead next year, potentially hitting many more families than have ever been affected by it, or it may be imposed retroactively, igniting court battles.

 It is a shame that a handful of billionaires, their lobbyists and mouthpieces in Congress have sold so many people on the concept of an immoral “death tax” that affects so few people. The Center on Budget and Policy Priorities has lobbied for continuation of a federal estate tax. In late 2007, it called the loss of family farms a myth and cited the American Farm Bureau Federation’s acknowledgement to the New York Times that it possessed no evidence of a single “family farm” being sold to pay federal estate taxes. It also pointed out that beyond the hundreds of billions in lost tax revenue posed by an elimination of estate taxes, the potentially disastrous decline in tax-advantaged gifts to charity should be a major public policy reason to keep the tax.

Federal Estate Taxes

If you are a billionaire on life support, no bets are being taken in Las Vegas about whether you will make it to the New Year, but odds are very likely that you will. When the federal estate tax expires at midnight, life support will no longer be required to dodge the big tax. I, along with most other estate planners, never thought the estate tax would hit the 1 year hiatus, but here we are. The health care debate in congress drowned out the need for Senate action. Next bets: whether the estate tax for people dying in 2010 will be made retroactive or whether nothing will be done prior to 2011 when the currently scheduled threshold for federal estate taxes will be $1,000,000. If the latter become a reality, look for interesting ways for the spectacularly wealthy to die in the last quarter of 2010.