By:  Al Young

Last December, President Obama and Congress acted. They did not let taxpayers face a situation where there was no federal estate tax in December, but there would be a federal estate tax on January 1st with an exclusion of only $1,000,000 and a tax rate of 55%. If that had happened, we might have been reading stories in the newspapers about families who pulled the plug on elderly relatives in December to avoid the estate tax. What a nightmare that would have been!

But our leaders did act, and in a surprising way. Rather than resurrecting the federal transfer taxes (estate tax, gift tax and generation skipping transfer tax) with the same exclusions and rates that existed in 2009, they increased the exclusions, cut the tax rates and made other taxpayer-friendly changes.

All of these changes are in effect through December 31, 2012. That means that our leaders must act again in only 2 years. But for now, significant planning opportunities are available.

For married couples, revocable trust agreements typically use a formula clause to allocate assets of the first to die to a credit shelter trust (often called a Family Trust) in an amount equal to the federal estate tax exclusion. The balance of the assets, if any, is given to the surviving spouse or to a trust for the spouse. With an estate tax exclusion of $5,000,000, in many cases all assets of the first to die will be allocated to the credit shelter trust. That may be inconsistent with your wishes;  you may want certain or all assets to pass directly to a spouse or to a trust for the spouse. The impact of the new higher exclusion on your particular situation should be reviewed with your attorney or other advisors at the earliest opportunity.

Portability. While the higher exclusions and lower tax rates have garnered most of the headlines, the new law contains a nugget that has not gotten much publicity: portability of the exclusion.

In years past, if the first spouse to die did not fully use his or her estate tax exclusion, that exclusion was lost. Under the new law, if the first to die does not fully use his or her exclusion, the surviving spouse can use the exclusion at his or her death. The transfer of the exclusion from one spouse to the other is referred to as portability.

Year Estate Tax Exclusion Gift Tax Exclusion GST Tax Exclusion Tax Rate
2009 $3.5 million $1 million $3.5 million 45%
2010 No Tax $1 million No Tax 35% (Gift Tax Only)
2011 $5 million $5 million $5 million 35%
2012 $5 million* $5 million* $5 million* 35%
*   Indexed for Inflation

With portability of the exclusion, in many cases, estate planning documents can be made much simpler. Rather than automatically allocating $5,000,000 of assets to the credit shelter trust at the first death, all assets could be transferred to the surviving spouse. Then the surviving spouse would use an exclusion of $10,000,000 to shelter assets from the estate tax at his or her death. Of course, there may be situations where it still makes sense to fund the credit shelter trust at the first death. Examples include second marriages, planning for grandchildren, and estates greater than $10,000,000.

Portability is only available during 2011 and 2012. If it is to survive beyond 2012, our leaders must act to make it permanent. A good way to take advantage of portability now is to leave all assets to the surviving spouse, but give the surviving spouse the right to direct that certain or all assets be transferred to the credit shelter trust at the first death.  This is known as a disclaimer. Plans that use this technique will remain viable even if portability is not extended beyond 2012.

Gift Tax Planning. As can be seen from the table above, prior to 2011, the gift tax exclusion was much less than the estate tax exclusion. In 2011 and 2012, the exclusions are the same. For those who used their $1,000,000 gift tax exclusion, an additional $4,000,000 exclusion is available. Now is a good time to make large gifts to family members, including grandchildren.

Generation Skipping Transfer Tax. For those with larger estates, the increase in the GST tax exclusion provides an opportunity to make additional transfers to grandchildren during both one’s lifetime and at death.  Importantly, the GST tax exclusion is not portable. If a married couple desires to leave more than $5,000,000 to grandchildren at death, funding a credit shelter trust or other trust at the first death should be done in order to use the $5,000,000 GST tax exclusion at the first death and allow the surviving spouse to leave up to another $5,000,000 to grandchildren at the second death.

If our leaders do not act to extend the new exclusions and tax rates beyond 2012, the pre-2001 exclusions ($1,000,000 for estate and gift taxes and approximately $1.35 million for the GST tax) and rates (55% for the estate tax, gift tax, and GST tax) will return. Now is a great time to consult with your attorney and other advisors to take advantage of today’s opportunities.


Al Young is a shareholder with the law firm of Fox, O’Neill & Shannon, S.C. in Milwaukee, WI.  He concentrates his practice on estate planning, tax and business law.  Al can be reached at 414-273-3939 or atyoung@foslaw.com.


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The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of Highland Investment Advisors, LLC. While every effort is made to ensure the accuracy of the information contained herein, Highland Investment Advisors, LLC assumes no liability or responsibility for the completeness, accuracy or usefulness of any of the information. Guest authors above are neither employees nor independent contractors of Highland Investment Advisors, LLC. No referral agreement exists between Highland Investment Advisors, LLC and the firms above. The information is published for informational purposes only and does not constitute an offer, solicitation, or recommendation of an investment or advisory service. Our privacy policy can be found on our website at Highlandinvestmentadvisors.com.

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