Estate Planning Update

President Obama signed the American Taxpayer Relief Act into law on January 2, 2013, finally resolving some, but not all, of the uncertainty surrounding the Federal gift, estate and generation-skipping transfer (“GST”) taxes. Below is a brief discussion of certain provisions of the legislation and inflation adjustments that affect estate planning in 2013, as well as a summary of estate planning techniques that continue to be viable but could be curtailed by future congressional action.

Federal Gift, Estate and GST Tax Exemptions and Rates Under New Legislation

The $5 million Federal gift, estate and GST tax exemptions have been made permanent and will be indexed for inflation. Each exemption is $5.25 million in 2013, up from $5.12 million in 2012. Accordingly, a client who has used his or her full $5.12 million Federal gift or GST tax exemption will have an additional $130,000 of exemption in 2013 ($260,000 for married couples that split gifts).

Taxable gifts in excess of the Federal gift tax exemption will be subject to Federal gift tax at a rate of 40%, increased from 35% in 2012. The Federal estate and GST tax rates have also been increased from 35% to 40%. To view a chart summarizing the 2012 and 2013 Federal transfer tax regime, click here.

With the extension of the $5 million Federal estate and GST tax exemptions, this may be an appropriate time for many clients to review their estate plans.

Review of formula gifts. Clients whose estate planning documents include a formula gift of the full Federal estate or GST tax exemption may wish to review their estate plans to consider whether the formula gift should be revised. For example:

• For a married couple, if the first spouse to die gives the full Federal estate or GST tax exemption to children or to a trust that does not include the surviving spouse as a beneficiary, the gift might divert too many assets from the surviving spouse.
• In several states, including New York, New Jersey and Connecticut, the use by a married couple of the full Federal estate tax exemption on the first death may generate a state estate tax. For many clients, it is nonetheless appropriate to utilize the full Federal exemption on the first death. Other clients may wish to eliminate the state estate tax on the death of the first spouse to die. There are a number of techniques to eliminate the state estate tax on the death of the first spouse to die, including relying on the “portability” rules, which allow a surviving spouse to use a predeceased spouse’s unused exemption, and, in Connecticut, the use of a marital trust that qualifies for the marital deduction for state, but not Federal, estate tax purposes.

Titling of assets. Married couples may wish to review how their assets are titled with a view toward having sufficient assets titled in each spouse’s name separately to make use of the full Federal estate tax exemption on the death of the first spouse to die.

Annual Exclusion Gifts

The annual exclusion amount has increased to $14,000 per donee in 2013 ($28,000 for married couples that split gifts), up from $13,000 in 2012. As always, we recommend that annual exclusion gifts be made as early as possible in the calendar year.

Planning in a Low Interest Rate Environment

The “benchmark” rate for a grantor retained annuity trust (“GRAT”), that is, the minimum investment return necessary to pass wealth to the GRAT beneficiaries, is 1.2% in February 2013. The lowest rates for intra-family loans for February 2013 are .21% (for loans up to 3 years), 1.01% (for loans greater than 3 years and up to 9 years) and 2.52% (for loans greater than 9 years). For a discussion of GRATs, intra-family loans and other estate planning techniques that are attractive in a low interest rate environment, see our Alert Memorandum dated November 19, 2008.

Possible Future Curtailment of Certain Estate Planning Techniques

The future of some estate planning techniques remains uncertain. The following techniques, described in prior Alert Memoranda, may still be implemented but could be modified or eliminated by future legislation:

Dynasty trusts. It is still possible to create a trust that will not be subject to Federal estate or GST tax over multiple generations. Proposals have been made to limit the transfer-tax-free nature of such trusts to 90 years.

Use of discount entities. Discounts for lack of control and marketability may still be taken into account in valuing family entities, such as family limited partnerships. The use of such discounts for certain transfers of interests in family-controlled entities may be eliminated by future legislation.

Short-term GRATs. It is still possible to create a GRAT with a term as short as two years. Future legislation may require a GRAT to have a term of at least 10 years.

Grantor trusts. The use of a grantor trust – whereby the grantor pays the income taxes on trust income so that the trust may grow income tax free – remains a viable technique but could be curtailed by future legislation.

If you would like to discuss your estate plan, please contact one of the attorneys in our Private Clients and Charitable Organizations Practice Group. 


Steven M. Loeb
(212) 225-2620
sloeb@cgsh.com

Judith Kassel
(212) 225-2062
jkassel@cgsh.com

Heide H. Ilgenfritz
(212) 225-2358
hilgenfritz@cgsh.com

Catherine A. Borneo
(212) 225-2292
cborneo@cgsh.com

Ruth Z. Plave
(212) 225-2094
rplave@cgsh.com

Amanda T. Oberg
(212) 225-2388
aoberg@cgsh.com 

Elana S. Bronson
(212) 225-2617
ebronson@cgsh.com

Naura M. Keiser
(212) 225-2439
nkeiser@cgsh.com 

Michele Leibson
(212) 225-2166
mleibson@cgsh.com