Estate and Some Clarity, for Now

That cleared up a good deal of confusion: There was no estate tax at all for people who died in 2010, but if Congress hadn’t acted, the estate tax would have been reinstated this year at a $1 million threshold — $2 million for married couples — and with a top rate of 55 percent. The new thresholds are in effect through 2012. Yet for all the attention given to the estate tax, a less widely noticed change in the law could affect more families. That is the lifetime gift tax exemption, now also $5 million — or $10 million for married couples. While the estate tax exemption gradually rose from $1 million in 2002 to $3.5 million in 2009, the lifetime gift tax exemption had not budged from $1 million. Now that the gift tax exemption is back in sync with the estate tax exemption, families might rethink how they transfer wealth, said Jonathan Bergman, a financial adviser at the Palisades Hudson Financial Group in Scarsdale, N.Y. “When the gift tax exemption was so much lower than the estate tax exemption, it made it more advantageous from a tax perspective to give away your money after death,” Mr. Bergman says. “Now there’s just as much incentive” to give during your lifetime. And Susan Colpitts, co-founder of Signature, a wealth advisory firm in Norfolk, Va., said, “It’s an opportunity to see that money be used and appreciated by your beneficiaries.” People who had previously used up their $1 million lifetime gift tax exemption now can shift an additional $4 million out of their estates. Married couples who had exhausted their combined $2 million exemption under the old law can now shift an additional $8 million through gifts. (The $5 million gift tax exemption is separate from the gift-tax exclusion and allows anyone to make annual gifts to an unlimited number of people. For 2011, the maximum you can give one person without tax implications is $13,000.) Craig Janes, national director of estate gift and trust services at Deloitte & Touche, says he is advising his clients “to make very large gifts now” because it isn’t clear what might happen to the exemption in 2013 and beyond. Even if Congress were to roll back the gift tax exemption in 2013 to some level below $5 million and it did not grandfather gifts made in 2011 and 2012, gifts made today would still remove the future appreciated value of the gift from an estate. For example, if you left $5 million in your estate and it grew to $20 million, that $20 million that would be subject to applicable federal estate taxes. But if you were to give $5 million today, no matter how the gift is eventually treated for estate tax purposes, any future gains on the $5 million will be left out of your estate. The higher gift exemption has implications for many people. “Doctors, lawyers, hedge fund managers or anyone with a risk of malpractice has a tremendous opportunity to shield more of their estate by shifting up to $5 million into special trusts,” says Martin Shenkman, an estate lawyer in Paramus, N.J. He also views the higher gift exemption as a “golden opportunity” for same-sex couples, or other unmarried couples, to shift assets. At the same time, the new law also created some potentially costly pitfalls, with inadvertent disinheritance being the most glaring risk. Because the federal estate tax exemption has changed often in recent years, many lawyers have fallen back on using a “formula clause” in trust documents rather than stating that a specific dollar amount be left to certain individuals. For example, a typical formula clause might say: “I leave to my children the maximum allowable amount that is not subject to federal estate tax, with the remainder going to my second wife.” As recently as 2008, that meant your children would receive $2 million. Now the same trust document would leave those children $5 million. If the total value of your estate is $5 million or less, you have disinherited your second wife. When reviewing the formula clause with your lawyer, Mr. Shenkman suggests that you also toss in a sentence or two that spells out your general intent. Something like, “My intent is to give some money to my children but leave the bulk of my estate to my wife,” can help clarify matters. Another potential problem concerns the new “portability” feature that Congress added to simplify estate planning for married couples. Under the new law, surviving spouses can add to their estate the unused portion of a deceased spouse’s exemption. For example, if a deceased husband used $2 million of his $5 million in lifetime exemptions, the unused $3 million at his death could be moved to his wife’s estate. In the past, spouses could share their exemptions only by setting up trusts, which is no longer necessary.