As you are no doubt aware, President Obama recently signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Act”).  Among other things, the 2010 Act made significant changes to the Federal estate, gift and generation-skipping transfer tax exemptions and rates.  The 2010 Act also introduced a novel concept which allows a surviving spouse to take advantage of a deceased spouse’s tax exemption (the concept of “portability”).  Unfortunately, the changes under the 2010 Act are only temporary; unless Congress acts further, in 2013 the estate and gift tax provisions will revert to their 2001 levels.

We want to highlight to you some of the major changes in the area of estate planning adopted under the 2010 Act.

Estate and Gift Tax Exemptions Increased to $5.0 Million.  The most significant change is the increase in the estate tax exemption and gift tax exemption to $5.0 million for 2011 and 2012.  This  increase in the gift tax exemption provides a unique opportunity for clients to avoid significant estate taxes and shift large amounts of wealth to family members without any gift taxes.  It provides particular opportunity for clients who had previously made use of their entire $1.0 million gift tax exemption.  They now have an opportunity to make gifts of $4.0 million more free of any gift tax.  Because of the danger that the estate and gift tax exemptions will drop back to $1.0 million in 2013, making use of that additional $4.0 million exemption before then might be prudent.

35% Maximum Estate and Gift Tax Rate.  The estate tax rate and the gift tax rate have both been reduced to 35%.  This compares favorably to an estate tax rate of 45% applicable in 2009.  The estate tax rate could return to a top rate of 55% in 2013.

Generation-skipping Transfer Tax Exemption Increased to $5.0 Million.  The generation-skipping transfer (“GST”) tax exemption (applicable to gifts and bequests to grandchildren) was also increased for 2011 and 2012 to $5.0 million, and the GST tax rate was lowered to 35%.  These changes are very beneficial to clients wanting to create “dynasty” trusts to keep wealth in the family for years to come.

Portability of Deceased Spouse Exemption.  The 2010 Act introduced the concept of “portability” between spouses.  If the $5.0 million exemption of a deceased spouse is not fully used upon death, the unused portion could be used by the surviving spouse.  The result would be that a surviving spouse could possibly have a $10.0 million exemption available upon death without the necessity of creating an “A-B Trust” (e.g., exemption trust or bypass trust).   While the concept appears attractive and could simplify planning for many clients, there are many non-tax reasons for still creating an “A-B Trust” (e.g., protecting beneficiaries of a deceased spouse, creditor protection for a surviving spouse, and keeping the appreciation of assets in the “B” trust out of the estate of the surviving spouse.)  But, like everything else, the concept of portability is only in effect for the next two years.

The 2010 Act has made major changes in the Federal estate tax laws which will impact all estate plans.  Because each client is unique, we are recommending to all our clients that they carefully review and consider the impact the new laws will have on their own estate plan.  As you review your estate plan in light of the new tax laws, this would also be a good time and opportunity to review your estate plan and make sure that your documents carry out your wishes and intent (e.g., any changes to trustees, executors or agents needed?  Changes in economic or family circumstances?)

If you have questions regarding the recent changes in the tax law or any estate planning concerns in general, we urge you to contact us.