Autumn 2011 - Estate Planning Follows The Bouncing Ball

By Richard S. Fisher

When we do estate planning these days, we adhere to the advice in that old advertisement, "follow the bouncing ball."

FEDERAL

In December 2010, the Tax Relief Act of 2010 became law. This Act increased the federal estate tax exemption to $5 million and set the top tax rate at 35%, effective for 2011 and 2012. It also created the concept of "portability" with any unused exemption from the deceased spouse becoming available to the surviving spouse (making it even easier for couples to protect an estate of up to $10 million from estate tax).

The estate tax and the gift tax have now again become unified. Accordingly, if substantial gifts (over the annual exclusion amount, currently $13,000 per person per year) are made, the amount of the gifts will be applied against the $5 million exemption.

The Federal generation skipping transfer tax exemption will be $5 million in both 2011 and 2012.

But here is where the bouncing ball goes into operation again --- there is no telling what Congress will do for 2013 and subsequent years. Most estate planners had forecast that Congress would act prior to the abolition of the estate tax scheduled for 2010 but that did not happen. The "experts" now feel that the $5 million exemption will be continued. We, as estate planners, can only act on what the law is now, and pay close attention to future developments in Congress.

CONNECTICUT

We must follow the bouncing ball in Connecticut as well. After the state legislature approved an increase in the Connecticut estate tax exemption from $2 million to $3.5 million per person for 2010, the exemption has now been rolled back to $2 million, effective January 1, 2011. With the state’s financial situation as it is, we do not expect an increase in the exemption in the near future. As has been the case since the law changed in 2005, the $2 million exemption is unified and applies to both gifts and estate.

PLANNING

Estate planners now have to take into consideration two different exemptions (state and federal) to make use of both of them and reduce estate taxes as much as possible. Our firm does this by using a three-share model that allows use of the both $2 million state exemption and the $5 million federal exemption, when necessary.

Many older estate documents, whether wills or revocable trusts, include language providing for "an amount up to the federal estate tax exemption" to be transferred to a trust for the lifetime benefit of the surviving spouse and then to pass to the children. The balance of the estate would either go to a marital trust or directly to the surviving spouse.

If your estate plan was done in 2001 when the exemption was $675,000, a $2 million decedent’s estate in 2001 would have resulted in $675,000 going into the trust and the balance perhaps going outright to the surviving spouse. Now that the federal exemption is $5 million, all of that $2 million decedent’s estate would pass into the trust and the surviving spouse would have only his or her existing assets. Because the Connecticut exemption is $2 million and the federal exemption is $5 million, there may be no need for a trust in this case.

CONCLUSION

If you have a large estate, it may pay to revise your will or trust to take advantage of both the Connecticut and federal exemptions. If you have a smaller estate, it may pay to eliminate the trust in your documents. In either case, we would be happy to review your estate plan and give you advice on the best route for you to follow given the current status of the law.