Estate, Gift and GST Tax Provisions of Tax Relief... Act of 2010, Enacted December 17, 2010

Transcription

1 Estate, Gift and GST Tax Provisions of Tax Relief... Act of 2010, Enacted December 17, 2010 December 17, 2010 Steve R. Akers Fiduciary Counsel

2 This presentation is provided for your general information. The discussion of any estate planning alternatives and other observations herein are not intended as legal or tax advice and do not take into account the particular investment objectives, financial situation or needs of individual clients. This presentation is based upon information obtained from various sources that Bessemer Trust believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current opinions only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. 2

3 How Did We Get Here? Fall of 2008: A perfect storm apparently prevented the repeal of the estate tax Lincoln/Kyl amendment to Budget Resolution 2009 Intervening two years of negotiations, talks broke down in Spring 2010 because not enough offsets for additional $60 billion 10-year cost Baucus bill filed on Dec. 2 would have applied the 45% gift tax rate and applied the GST tax to transfers after the date of introduction ( ) Announcement on Dec. 6 of Republican agreement with President, including twoyear extension of estate tax with $5 million exemption and 35% rate Passed Senate Dec. 15 (81-19); Passed House December 16 ( ); President expected to sign Dec. 17 How? Perfect storm Bush income tax cuts Economy stimulus Republican seats increase in next Congress Behind the scenes 3

4 General Provisions Short Title: Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 Temporary Extension two years Section 901 sunset provision of EGTRRA extended to years following 2012 [TRA ] TRA says section 901 of EGTRRA applies to the amendments made in TRA

5 General Summary of Estate, Gift and GST Tax Provisions Exemptions and Rates Generally Exemption: $5 million exemption (truly unified for estate, gift and GST purposes) Indexed from 2010 to nearest $10,000 beginning in 2012 Estate and GST beginning in 2010 Gift beginning in 2011 ($1 million in 2010) Rate: 35% (beginning in 2010) 5

6 Estate Tax Provisions Estate tax applies from January 1, 2010 (the default rule) TRA (a): Each provision of subtitle A or E of title V of ]EGTRRA] is amended to read as such provision would read if such subtitle had never been enacted. Subtitle A: 2210 (repeal of estate tax after 2009) and 2664 (repeal of GST tax for GST transfers after 2009) Subtitle E: Carryover basis provisions ( 1022, 6018 [carryover basis report instead of estate tax return], 6075(a) due date of report) Carryover basis election for decedents dying in 2010 Executor (defined in 2203) can elect out of the estate tax and into carryover basis 6

7 Carryover Basis Election Statutory language your head will spin TRA (c) If election is made, amendments made by 301(a) do not apply with respect to chapter 11 and with respect to property acquired or passing from such decedent (within the meaning of section 1014(b)) 2210 repealed the estate tax [Step 1-estate tax not apply] 301(a) says treat as if 2210, 1022, & 6018 carryover basis report provisions had never been enacted [Step 2-estate tax does apply, carryover basis does not apply] 301(c) says if election made, 301(a) does not apply [Step 3-estate tax does not apply, and carryover basis does apply] Observe: The carryover basis election does not affect the repeal of 2664 (which repealed the GST tax) Transferor rule for GST purposes if election is made so estate tax does not apply, that does not impact whether the decedent is a transferor for GST purposes [Effect: Testamentary trusts of 2010 decedents are not exempt from the GST tax forever] 7

8 Extension of Time to File and Pay Estate and GST Tax and Make Disclaimers Extension of time to file estate tax or GST return and pay estate or GST tax to no earlier than nine months after date of enactment Extension of time to file carryover basis report to no earlier than nine months after date of enactment. (Not overly important extending decedent s final income tax return extends this report to Oct. 17, 2011 even without this provision) Disclaimers For decedents dying in 2010, extension of time to make disclaimers of property passing by reason of the decedent s death to nine months after date of enactment. Problem: Beneficiary may have already accepted benefits, precluding disclaimer Problem: State statutes often have a nine-month time limit from date of death Will states amend their disclaimer statutes? 2518(c)(3): Transfers that do not qualify as disclaimers under local law still qualify if they operate as valid transfers under local law to persons who would have received the property had it been a qualified disclaimer under local law 8

9 Portability Surviving spouse can use unused exemption of last deceased spouse 2010(c): Surviving spouse gets (a) basic exclusion amount, plus (b) deceased spousal unused exclusion amount 9

10 Portability Practical Planning Pointers Executor of first spouse must file estate tax return on timely basis and make election for surviving spouse to be able to use unused exemption (Statute of limitations stays open to determine proper amount of unused exemption) Only applies to last deceased spouse Mere remarriage will not remove right to the unused exemption, but if new spouse predeceases, then only THAT spouse s unused exemption could be used Privity requirement? Joint Committee on Taxation Technical Explanation Example 3: H1 dies with $2 million unused exclusion. W s exclusion amount is $7 million ($5 + $2 million). W dies with taxable estate of $3 million. H2 has benefit of W s unused exclusion amount which is $4 million (Wife s $7 million applicable exclusion amount less her $3 million taxable estate). That is difficult to rationalize with the statutory language. Applies for gift tax purposes also (Perhaps better to make gifts to use exemption to make sure it is not lost by remarriage and death of new spouse or by a law change; Query, does surviving spouse have to use his or her own gift exemption first?) Portability does NOT apply for GST purposes Perhaps useful if retirement benefits are major asset of the estate Like the rest of TRA 2010, this sunsets in two years 10

11 Gift Exemption Unification of gift exemption (beginning in 2011) Still $1.0 million for 2010 HUGE ramifications for transfer planning 11

12 GST Tax Applicable Rate under 2641(a) is zero in (a): Applicable rate is the maximum Federal estate tax rate times the inclusion ratio with respect to the transfer [AR = ETR x IR] There is no GST tax on GST transfers (direct skips, taxable distributions or taxable terminations) in 2010 Does this mean that all transfers to trust in 2010 have an inclusion ratio of zero (and are exempt from the GST in future years)? Joint Committee on Taxation Technical Explanation says the inclusion ratio is not zero: the generation skipping transfer tax rate for transfers made during 2010 is zero percent. The generation skipping transfer tax rate for transfers made after 2010 is equal to the highest estate and gift tax rate in effect for such year (35 percent for 2011 and 2012). 12

13 GST Tax GST Tax applies after 2010 (TRA 301 repeals 2664; Applicable rate is zero only in 2010) GST Exemption is $5.0 million in 2010 For estates that make the carryover basis election, there is an argument that there is no GST exemption this year because the GST exemption equals the estate tax exemption, the estate tax exemption is in chapter 11, and chapter 11 does not apply. The was not intended and there is a technical counterargument Joint Committee on Taxation Technical Explanation agrees there is $5.0 million GST exemption even if the carryover basis election is made (footnote 53) GST Exemption in future years is $5.0 million, indexed from 2010, beginning in 2012 GST Tax Rate: 35% 13

14 Sunset of EGTRRA EGTRRA 901 provided that the Code would be interpreted as if the provisions of EGTRRA had never been enacted with respect to decedents dying after, gifts made after, and GST transfers after Raised concerns after 2010 about the many provisions in EGTRRA other than just the exemptions and rates TRA (a) alleviates those concerns by saying that only subtitle A and E sunset after 2009 and all of the other provisions in EGTRRA continue in effect. However, TRA says all the estate tax changes in the Act are subject to EGTRRA 901 and TRA (a) says that EGTRRA 901 is just extended for two years All of the estate tax changes in TRA 2010 and all of EGTRRA sunsets in two years with respect to decedents dying after, gifts made after, and GST transfers after All of the concerns we have had about 2011 are now extended to

15 Effective Dates January 1, 2010: Estate tax (subject to carryover basis election); Estate and GST Exemptions of $5.0 million, 35% top estate tax rate; Direct skips and taxable distributions may be made in trust January 1, 2011: Unification of gift and estate exclusion amounts; Portability Date of Enactment: Extension of time for filing and paying estate and GST tax and for making disclaimers (only available for decedents dying before and GST transfers before date of enactment) 15

16 What s Left Out? Items in Baucus Bill Farmland exclusion (with unlimited recapture) Special use valuation (increase in reduction amount to $3.5 million in Baucus bill) GRAT 10-year minimum term (also in President s Budget Proposal) Consistency of basis (also in President s Budget Proposal) Others Tightening of 2704 (in President s Budget Proposal, but not included in any bill) State death tax deduction remains (Without legislation, the state death tax credit would have re-emerged in 2011 which would have re-enacted state estate taxes in many states) 16

17 Effects on Year End Planning Gentlemen, start your engines The wait is over to pull the trigger on year planning. Under TRA 2010, generally do not make gifts for gift tax purposes in 2010 (other than annual exclusion gifts). (More gift exemption in 2011, delay paying gift tax for a year). But if client is willing to pay gift tax and the client lives three years, could be an advantage to give in Significant GST opportunities (Baucus bill would have cut off GST transfer opportunities as of Dec. 2, 2010) Direct skips and taxable distributions in trust (free of GST tax) are clearly permitted (This unique opportunity ends on January 1) Balancing required: Is it better to wait to make gifts to grandchildren until January (to avoid gift tax with the larger gift exemption) and allocate GST exemption to the transfer, or to make the gift in 2010 and pay gift tax but avoid using any GST exemption? Efforts to rescind prior taxable 2010 gifts? 17

18 GST Issues Direct skip or taxable distributions in trust Testamentary transfer from 2010 decedents are not exempt from GST tax $5 million GST exemption in 2010 (three concerns/opportunities) Elect out of automatic allocation for direct skip transfers in Very important as this will get overlooked. Timely allocation of 2010 GST exemption. Transfers CAN be made in 2010 to exempt trusts without having to wait to make a late allocation of 2011 exemption. Late allocations of 2010 exemption to transfers in prior years. 18

19 Construction Issues Construction of formula bequests Maximum amount that can pass free of estate tax now means $5.0 million rather than the entire estate Amount equal to federal estate tax applicable exclusion amount now means $5.0 million rather than zero Does executor s decision to make carryover basis election change that? What if estate has already made distributions under law that applied until Dec. 17? State construction statutes. Seventeen states have statutes that construe formula clause for 2010 decedent as referring to estate tax rules on Dec. 31, (Delaware, D.C., Georgia, Idaho, Indiana, Maryland, Minnesota, Nebraska, New York, North Carolina, Pennsylvania, South Dakota, Tennessee, Utah, Virginia, Washington, Wisconsin) They typically say that if the federal estate or generation-skipping transfer tax becomes effective before January 1, 2011, the statute will no longer apply as of the date the tax becomes legally effective. Under TRA 2010, the estate tax applies as of 1/1/10 unless the carryover basis election is made Does executor s election for carryover basis to apply instead of estate tax result in $3.5 million bequest to nonmarital share vs. $5 million if no election is made? GST formula bequests---must look closely at language of the formula 19

20 Effects on Planning Going Forward Many families have no estate tax concerns with a $5M exemption ($10M for a couple) Simple gifts ($5M exemption); Make gifts while we know there is a $5M gift exemption; will that change in 2013? Gifts to grantor trusts: (Grantor pays income tax, moving large amounts out of the estate over time; Simple $5M ($10M for a couple) gifts to grantor trusts can transfer huge amounts over time) Gifts and sales to grantor trusts: A typical concern is how to get the necessary seed amount into the trust without paying gift tax; $5M gift exemption eases that concern GRATs may lose some of their sizzle if clients can transfer all they want without paying gift tax with the $5M gift exemption; gift and sale to grantor trust has GST advantage Gift splitting to use $10M exemptions even if one spouse owns all the assets Gifts of undivided interests in real estate Life insurance transfers ($5M of gifts can pay premiums on a huge policy) Donor as discretionary beneficiary? Voluntary tax? 20

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