Legal News

New Tax Law Calls for Extensive Work in Estate Planning

By Brian Harris

By Robert H. Louis
Special to the Legal

Nearly every news source has carried reports on the tax bill just passed by Congress. It makes fundamental changes in the laws applicable to planning to minimize federal taxation at death. And it does so in a bill that has those changes expiring in two years.

When that two-year extension comes up for renewal, we will know who will be the president for the following four years and who will control Congress. But right now, all we know is that there are extensive opportunities for planning for our clients that can save them significant amount of taxes; and there is a need to review almost all existing documents to see how they work under the new law. There are few areas of legal practice in which the basic laws used in the practice change so often and in such a broad and sweeping way.  And in this case, the change that came was hoped for, but it was surprising that it occurred so quickly and with so little opposition.

For the next two years, federal estate tax will be imposed at a flat 35 percent rate. There will be an exemption for the first $5 million of assets, indexed for inflation for the first time. This exemption will be available to married individuals in a way that is very different from prior law.

In essence, a married couple will have a $10 million exemption. The estate tax exemption will be ?portable.? That means that if one spouse dies with, for example, $2 million, the surviving spouse will have his or her own exemption plus the unused $3 million from the first spouse. This change alone will necessitate review of all wills for married couples. And we have already had suggestions, perhaps only partly in jest, that aggressive tax planning might involve wealthy couples getting divorced and then each of them marrying someone with few assets and in poor health. I would say that it?s wholly in jest, but in due course we will read of someone doing just that.

Here is another very important change in the law. There will be an increase in the lifetime gift tax exemption from $1 million per person to $5 million per person.  This expands greatly the ability of wealthy people to make gifts during their lifetimes.

Other changes include an extension of the ability to do a charitable IRA rollover, a direct transfer of IRA assets to a charity. This is a provision limited in terms of who can make use of it, but it can be useful in the right circumstances. For those who died in 2010, the year of no estate tax, there will be a choice between paying estate tax or having no step-up in the basis of assets. There are also changes in the generation skipping tax that make such transfers easier to accomplish. A proposal to limit the effectiveness of grantor retained annuity trusts, by requiring a minimum 10-year term, did not make it into the final bill.

The combination of these changes means that lawyers who work in the estate planning field will have busy schedules over the next two years. In addition, as one commentator has already noted, this law moves us closer to the concept of the federal estate tax as a voluntary tax, imposed on those who don?t plan to avoid it.

Robert H. Louis is a partner and co-chairman of the personal wealth, estates and trusts department at Saul Ewing. His practice includes estate, tax and retirement planning for individuals and closely held businesses. He is a fellow of the American College of Tax Counsel and a graduate of the Wharton School and the Harvard Law School. Louis can be reached at rlouis@saul.com and 215-972-7155.

Full post as published by The Legal Intelligencer Blog on December 17, 2010 (boomark / email).