Retroactivity and Portability Claw Back!

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Retroactivity, portability, claw back, oh my! Now that the dust has settled on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the "Act") signed by President Obama on December 17, 2010, let's talk about the high and low points of it with regard to estate planning.

First, the high - the exemption amount (the amount you can pass to your heirs, free of estate tax, is now $5,000,000 per person (up from a slated $1,000,000). And, the low: the estate tax rate is currently 35% (down from 55%). And the goofy — this exemption amount and rate applies going forward only for 2011 and 2012. It also applies retroactively to 2010 (more on that later). If the law is not again changed, in 2013, the exemption amount will drop to $1,000,000 with the rate increasing to 55%.

The Act also provides for "portability" of the exemption amount between spouses, allowing for a total $10,000,000 exempt from estate taxes, providing both spouses die before 2013. Not surprisingly, there are technicalities that must be followed. In order to preserve the unused applicable exclusion amount, the executor of the first spouse to die must file an estate tax return, even when no taxes are due. The surviving spouse may use only the remaining exemption amount of his or her last spouse. If a surviving spouse remarries (within these two years) and the new spouse has already used his or her exemption, the surviving spouse has lost the use of the predeceased spouse's exemption. I'm just reporting, I don't make this stuff up.

Retroactivity: we began 2010 with no estate and gift tax and a change in capital gains tax laws. December 17, 2010, the law changed, enacting a default rule $5,000,000 exemption from estate and gift taxes, with a 35% tax rate on individual estates in excess of $5,000,000. However, if it is more advantageous, heirs of persons dying in 2010 may elect out of the estate tax via a Form 8939 (a form which does not yet exist but is due to be available any day now) in order to take advantage of more favorable carryover basis rules for capital gains tax purposes.

And, what's this talk of a "claw back?" The gift and estate tax exclusions are reunited at $5,000,000 and the gift tax rate is also 35% now. But, what if you make a gift of $5,000,000 today and later die when the exemption amount is less than $5,000,000? It appears the difference between the exemption amount at the time of death and the gifted amount will be subject to a 35% tax. IRS says it did not intend this. However, it will require an act of Congress to correct this glitch.

For the next two years, it is possible unintended consequences will also occur with some "A/B" trusts that transfer the maximum amount that can pass free of estate taxes to a Bypass ("B") trust payable to someone other than the spouse (such as children of a prior relationship). For many couples this would mean everything passes to the children and nothing to the surviving spouse. How does all this affect you and how do you plan for estate taxes when the exemption amount when you pass may be $5,000,000, or $1,000,000, or some number in between?

I do not have a crystal ball or any particular inside information. For what it is worth I can tell you President Obama's Fiscal Year 2012 Revenue Proposals (aka: President Obama's 2012 proposed "budget") contemplates a $3,500,000 exemption amount at a 45% tax rate. This proposal would also make permanent the portability provisions of the 2010 Act.

So, how should you proceed?

First, start with the easy stuff - look at the Schedule of Assets at the end of your trust. Make sure everything is up to date. If a bank has changed names or a property has been sold or a new property purchased - make corrections on your Schedule. If your Schedule gets too messy, type a new one. While you are at it - send a copy to our office to keep in your file. Also, you might want to double check the names, addresses and phone numbers of persons you have named as successor trustees of your trust, executors of your will, attorneys in fact on your power of attorney and agents for you in your advance health care directive.

Second, it is most likely we have already built in a great deal of flexibility in your estate planning. Unless you have children from prior relationships and/or you expressed to me serious concerns about your spouse revising your joint estate planning if he or she survives you, chances are we have created a trust for you that provides maximum estate tax savings and flexibility.

If you have any doubts, give the office a call and, if necessary, we will schedule a review of your current plan. As always, there is no charge for the consultation and if I have recommendations for any work that should be done on your behalf, I will clearly explain your options and tell you in advance what the expected fee will be for the work required. If you have any other questions, please do not hesitate to call.

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

Copyright 2013 © by Jacqueline M. Skay. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.

Estate and Trust Law
A Professional Law Corporation

Jacqueline Skay - Attorney at Law

760.745.7576
jskay@estateandtrustlaw.com

Retroactivity and Portability Claw Back!

Click here to return to Our Newletter.

Retroactivity, portability, claw back, oh my! Now that the dust has settled on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the "Act") signed by President Obama on December 17, 2010, let's talk about the high and low points of it with regard to estate planning.

First, the high - the exemption amount (the amount you can pass to your heirs, free of estate tax, is now $5,000,000 per person (up from a slated $1,000,000). And, the low: the estate tax rate is currently 35% (down from 55%). And the goofy — this exemption amount and rate applies going forward only for 2011 and 2012. It also applies retroactively to 2010 (more on that later). If the law is not again changed, in 2013, the exemption amount will drop to $1,000,000 with the rate increasing to 55%.

The Act also provides for "portability" of the exemption amount between spouses, allowing for a total $10,000,000 exempt from estate taxes, providing both spouses die before 2013. Not surprisingly, there are technicalities that must be followed. In order to preserve the unused applicable exclusion amount, the executor of the first spouse to die must file an estate tax return, even when no taxes are due. The surviving spouse may use only the remaining exemption amount of his or her last spouse. If a surviving spouse remarries (within these two years) and the new spouse has already used his or her exemption, the surviving spouse has lost the use of the predeceased spouse's exemption. I'm just reporting, I don't make this stuff up.

Retroactivity: we began 2010 with no estate and gift tax and a change in capital gains tax laws. December 17, 2010, the law changed, enacting a default rule $5,000,000 exemption from estate and gift taxes, with a 35% tax rate on individual estates in excess of $5,000,000. However, if it is more advantageous, heirs of persons dying in 2010 may elect out of the estate tax via a Form 8939 (a form which does not yet exist but is due to be available any day now) in order to take advantage of more favorable carryover basis rules for capital gains tax purposes.

And, what's this talk of a "claw back?" The gift and estate tax exclusions are reunited at $5,000,000 and the gift tax rate is also 35% now. But, what if you make a gift of $5,000,000 today and later die when the exemption amount is less than $5,000,000? It appears the difference between the exemption amount at the time of death and the gifted amount will be subject to a 35% tax. IRS says it did not intend this. However, it will require an act of Congress to correct this glitch.

For the next two years, it is possible unintended consequences will also occur with some "A/B" trusts that transfer the maximum amount that can pass free of estate taxes to a Bypass ("B") trust payable to someone other than the spouse (such as children of a prior relationship). For many couples this would mean everything passes to the children and nothing to the surviving spouse. How does all this affect you and how do you plan for estate taxes when the exemption amount when you pass may be $5,000,000, or $1,000,000, or some number in between?

I do not have a crystal ball or any particular inside information. For what it is worth I can tell you President Obama's Fiscal Year 2012 Revenue Proposals (aka: President Obama's 2012 proposed "budget") contemplates a $3,500,000 exemption amount at a 45% tax rate. This proposal would also make permanent the portability provisions of the 2010 Act.

So, how should you proceed?

First, start with the easy stuff - look at the Schedule of Assets at the end of your trust. Make sure everything is up to date. If a bank has changed names or a property has been sold or a new property purchased - make corrections on your Schedule. If your Schedule gets too messy, type a new one. While you are at it - send a copy to our office to keep in your file. Also, you might want to double check the names, addresses and phone numbers of persons you have named as successor trustees of your trust, executors of your will, attorneys in fact on your power of attorney and agents for you in your advance health care directive.

Second, it is most likely we have already built in a great deal of flexibility in your estate planning. Unless you have children from prior relationships and/or you expressed to me serious concerns about your spouse revising your joint estate planning if he or she survives you, chances are we have created a trust for you that provides maximum estate tax savings and flexibility.

If you have any doubts, give the office a call and, if necessary, we will schedule a review of your current plan. As always, there is no charge for the consultation and if I have recommendations for any work that should be done on your behalf, I will clearly explain your options and tell you in advance what the expected fee will be for the work required. If you have any other questions, please do not hesitate to call.