New Law on Death Tax in a Nutshell

While I try to make time for a full report, here it is in a nutshell.  The new law [passed 12/17/2010, Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA 2010)] is temporary, pushing sunset of EGTRRA back to end of 2012, but contains a number of interesting provisions that bode well for the future.  For example, increase of the applicable exclusion amount to $5 million (inflation adjusted!) and on top of that, re-unification of gift tax with estate tax (increasing potential gift exclusion from $1 million to $5 million) and portability for the surviving spouse to use the deceased spouse's unused exclusion amount (DSUEA), which is NOT inflation-adjusted.  (Already, there is speculation of unintended consequences of this portability–eg, last minute marriage ceremonies in hospitals.)  Ideally, an estate plan is well-maintained and optimized due to regular contact with a non-docucentric estate planning attorney, and you could simplify your plan for the next two years.  Unfortunately, most folks, even the relative few that take on the responsibility of planning, do not have a regular relationship with an estate planning attorney, or worse, drafted an undocumented document drafter to draft their documents.  Therefore, because the new law is temporary, unless you are on some kind of trust maintenance plan or at least have regular contact with an attorney specializing in this area, it may be safer in many cases to continue planning with flexible approaches such as disclaimer trusts and Clayton election provisions allowing for post-mortem planning.  In a couple years, if nothing is done, the exclusion amount will return to only $1 million.  On the other hand, the temporarily increased exemptions make it less "expensive" (guv-speak) for Congress to actually give us the repeal they have been teasing us with.  Or maybe a compromise will be reached on an intermediate exclusion amount.  Or maybe another temporary extension of EGTRRA!  We are back to the same guessing game, just more things to guess at.

Many families will opt to continue using irrevocable subtrusts (eg, bypass, QTIP) due to blended family concern or concern of remarriage, or non-citizen status, or asset protection, etc.

Perhaps the most interesting feature of the new law, one of huge and lasting potential, is that re-unification with the gift tax vastly increases the lifetime exemption for gifts and creation of well-funded dynasty trusts such as the Firearms Instruction and Responsible Stewardship Trust (F.I.R.S.T. Family Trust).  We have a TWO-YEAR WINDOW of incredible OPPORTUNITY!  Yes, you can freeze out appreciation from your estate while turning your family into a firearms training institution, or whatever else you want.

Finally, those dealing with deaths occurring in 2010 have the option of electing out of the estate tax and 1014 step-up, and instead paying capital gains tax (or getting rid of it with basis allocations).  Just about every estate under $5 million is going to take the estate tax with its $5 million exclusion, but larger estates will need to consider a great many factors including DSUEA, comparison of estate tax v. likely capital gains tax rate, likely inflation, likelihood of even selling and how to discount that to present value, and allocation of basis may need to be deftly negotiated in order to avoid conflict.

Keep in mind this brief note is general info, and many other issues may arise.  For example, aside from the federal death tax discussed here, many states have a state-level estate or inheritance tax, and if you have some property in one of those states you may need other planning.

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