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All Clients Should Review their Estate Plans in Light of New Federal Gift, Estate, and Generation-Skipping Tax Changes

October 30, 2016

As previously noted in our January 2011 ALERT, the federal estate, gift, and generation-skipping tax exemption is now $5 million (and the top tax rate has been lowered to 35%) under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the "2010 Tax Act"), signed into law on December 17, 2010. These changes may significantly impact existing estate plans. Unprecedented new gift and generation-skipping planning opportunities are available in 2011 and 2012 for larger estates, and estate planning document reviews are encouraged for most clients in light of the new law changes.

For existing wills and revocable trusts of married individuals:
For individuals with existing wills or revocable trusts that have references to "credit shelter amounts," "bypass amount," "applicable credit amount," "credit shelter trust," "marital trust," "A share/B share," "marital share," "marital deduction share" or "QTIP trust," your estate plan may no longer operate as you intended under this new law.

This is especially the case for individuals living in New Jersey and New York, and any other states that have "decoupled" themselves from the present federal estate tax regimen.

For example, a New Jersey or New York resident who dies in 2011 with a will that provides for the funding of a "credit shelter" trust equal to the federal exemption and who has assets in excess of $5 million, will pay no federal estate tax to fully fund this $5 million credit-shelter trust, but will pay a New Jersey or New York estate tax of $391,600.

A more flexible plan that does not mandate the full use of the federal exemption could at the very least delay, and potentially avoid, state estate taxes, although full funding of the credit shelter trust in other cases may be worth the up-front state death tax cost. In particular, couples with combined assets of less than $10 million whose wills or revocable trusts require the full use of the federal estate tax exemption should consider making changes that allow for greater flexibility. Couples who expect to migrate to states that do not have an estate tax should also consider a more flexible estate plan. These more flexible plans can provide for what are known as "QTIP" or "disclaimer" trusts at the first spouse's death that permit post-mortem adjustments for optimal tax planning. And under this new law, it is even possible for the deceased spouse's unused federal estate tax exemption to be given to the surviving spouse ("portability") to be added to the surviving spouse's exemption at the surviving spouse's death, thereby utilizing both exemptions without the need to fund a trust at the first death.

For wills and revocable trusts that implement generation-skipping plans ("GST"): For individuals whose wills or revocable trust mandated full use of the federal generation-skipping tax exemption, the increase in that exemption to $5 million may cause more of their estates to pass down to future generations than they intended. In other cases, where full use of GST exemptions is desired, clients may need to retitle their assets to allow both spouses to utilize the increased $5 million GST exemptions. These plans should similarly be revisited.

For wealthy individuals who want to make additional gifts: On the positive side, individuals with significant assets are encouraged to take advantage of the expanded lifetime gift and/or GST exemptions (previously $1 million, and now $5 million). People who have already used the prior gift tax exemptions will now have the ability to make additional, substantial, non-taxable gifts. Where appropriate, those clients who wish to pass these gifts to future generations can take advantage of the increased GST exemptions as well. These unprecedented gift and GST planning opportunities in 2011 and 2012 should be utilized while they are available. The new law sunsets after December 31, 2012 (unless Congress acts in the meantime and shortens the window of opportunity). Suffice it to say, all clients are advised to take a fresh look at their estate plans in light of the significant gift, estate, and GST tax law changes. Further, while addressing the new planning considerations and opportunities offered by the 2010 Tax Act, we suggest that clients take advantage of this opportunity to thoroughly review the balance of their planning, including the following:

  • Update fiduciary selections;
  • Review administration of trusts;
  • Update organization of important papers and financial information;
  • Revisit need for long-term trusts in light of increased estate exemptions;
  • Update Powers of Attorney and Health Care Proxy/Living Wills, including consideration of designating successors;
  • Incorporation of charitable giving in your estate plans;
  • Consideration of Roth Conversions; and
  • Consider planning needs for parents and children.

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