I have written previous blogs on this topic in an effort to plan and keep my clients informed of the possibilities for the future. As we rapidly move forward to the end of the year, I thought that by now, we would have seen some discussion in congress on the estate tax law and possibly an amendment to the current legislation. Everyone had predicted that 2009 would be the year we saw change, but what if Congress just allows the estate tax to go back to 2001 levels?
Let’s review the current law as it exists today 2009: $3.5 million exclusion from generation skipping transfer (GST) tax; $3.5 million exclusion from estate tax; $1 million exclusion from gift tax; 45% top marginal rate and no credit for state estate taxes (states like Maryland and DC imposed their own estate tax, which is currently a deduction on a Federal estate tax return).
Now, for 2010 we are slated for no Federal estate tax; no Federal GST tax and $1 million exclusion from gift tax. If nothing happens in Congress, then we are slated to return in 2011 to the pre-2001 tax laws: i.e., $1 million GST exemption (as indexed for inflation after 1998); $1 million exclusion from estate tax; $1 million exclusion from gift tax; a 55% top marginal estate tax rate, and state death tax credit reappears (so that any state death tax is a dollar for dollar reduction from the Federal estate tax).
This scenario of uncertainty makes it extremely difficult for advisors and their clients in the creation of estate planning documents. Some possibilities are: Congress could do nothing; Congress could pass a one year extension of the 2009 law; Congress could extend the current law and exemption levels permanently; Congress could reduce or increase the various exclusions rate etc.
And, while I hope not, the administration and lawmakers in Congress could just allow the 2001 estate tax reform legislation to expire and therefore the estate tax laws would revert to the pre-2001 limits in 2011. The question becomes how do you plan and discuss strategies and make recommendations to clients. I have always advised clients to plan for the tax law that we currently have, but to keep your estate plan flexible enough to account for future changes to the tax laws or your assets and net worth.
However, given the current uncertainty and the possibility that Congress could allow the current law to lapse so that we have once again have an exclusion from GST tax to be $1 million (as indexed), some clients may want to plan to avoid GST tax on a full 3.5 million dollars worth of assets, even if the law in the future only allows for an exclusion at a lower rate.
One strategy would be to make a taxable gift in 2009, pay gift tax in 2010, and exempt as much as 3.5 million from GST tax. Only clients who have very large estates should even consider this pre-payment of gift (and estate) tax. If you are interested in this type of strategy, you would be able to provide a future estate and gift and GST tax pool of funds that would be available for multiple generations of your descendants.
A second strategy would be to create a trust for the benefit of your spouse. While there would be no current estate or gift tax, you would be able to fully use your 3.5 million exclusion from GST tax by using a currently little used technique called a “reverse QTIP election”. Basically, you would establish a QTIP Trust for your spouse, fund it with 3.5 million of assets, file a gift tax return next year, and fully allocate your GST exclusion to the 3.5 million gift to the QTIP Trust. Again, you would be able to provide for your future descendants to have access to a pool of funds that would never be subject to estate, gift or GST taxes.
Using these and other strategies can provide for a tax free transfer of wealth to your future generations. Creating a flexible estate plan that takes into account the current estate tax laws will produce the most optimal estate plan for you and your heirs.