The sun has set on 2009. The dawn of the new year brought repeal of the estate and generation skipping transfer tax exemptions. The gift tax exemption remains at $1 million at a tax rate pf 35%.
But, unfortunately, we are no closer to a real solution to perennial estate planning uncertainties. If there is no action in Washington, the estate and GST taxes are restored in 2011, the exclusion drops to $1 million and the rate increases to 50%.
In light of the uncertainty, we are urging clients to revisit their estate plans and take maximum advantage of available estate planning techniques.
Suggestions
Family limited partnerships, properly structured and properly administered, will continue to be successful. The IRS attacks have been sustained where the transferor retained control. If a client is willing to give up control, or is willing to put control in an independent third party, discounts should be available. With IRS victories in cases like Shepard and Strangi, it is very important to observe formalities.
In our office, we limit taxable gifts to $1 million to avoid payment of gift tax, and we therefore are looking to techniques that freeze the value of the estate. Grantor Retained Annuity Trusts (GRAT’s) and sales of property to Intentionally Defective Grantor Trusts (IDGTs) work particularly well in the present low-interest rate environment. After the Walton case, the IRS has changed its regulations and now agrees that GRATs can be zeroed out.
Qualified Personal Residence Trusts (QPRTs) are also in favor among our clients because they provide an excellent (and Internal Revenue Code sanctioned) opportunity to reduce the taxable estate without a reduction in present income or a change in lifestyle.
In short, there are still planning opportunities available to minimize transfer taxes! Even clients with more moderate wealth should review their estate plans. Tax- oriented provisions may no longer be necessary. Formula clauses may cause unintended results.
And while we all clearly love New York, it continues to be a very expensive state in which to die. New York collects a tax based on the Federal credit for state death taxes. To put this in perspective, a domiciliary of New York with a $10 million dollar estate is “out of pocket” about $800,000. A domiciliary of Florida with a $10 million dollar estate is “out of pocket” zero.
The problem arises because New York‘s exclusion has remained at $1 million. The New York estate tax on the extra $2,500,000 is $229,200. Under present rates, getting $3,500,000 (instead of $1 million) into the credit shelter trust could save approximately $1.1 million in Federal tax in the estate of a surviving spouse. But, is it worthwhile to pay $229,200 today when we don't know if there will be an estate tax at the time of the surviving spouse's death?
Our drafting now for New York residents includes a credit shelter trust for the $1 million and a qualified terminal interest property (QTIP) marital trust for the excess. Alternatively, where appropriate, our drafting allows the surviving spouse to “disclaim” property that will fund a credit shelter trust. Either of these drafting possibilities will allow the question to be deferred until 9 months after the date of the first death. (Incidentally, New Jersey “froze” its exemption at $675,000 as of January 1, 2002 and Connecticut has increased its exemption to $3.5 million.)
