Notable 2011 Legislation Impacting Estate Planning

By Jan P. Myskowski

NH Estate Planning Update
January 4, 2012

In terms of legislative changes, and their impact on the year ahead, here is a brief summary of what we feel is most notable.

Portable Federal Estate Tax Exemption

During 2011, much debate has occurred among estate planning professionals regarding the utility of the “portable” federal estate tax exemption. This is a new concept introduced by the federal estate tax legislation passed at the end of 2010. This provision allows the decedent’s executor to transfer the decedent’s unused federal estate tax exemption to the decedent’s surviving spouse. This has been touted as a welcome simplification of estate planning because it can be used to avoid the use of credit shelter trust planning.

The idea is that you would leave your property outright to your spouse, and give him or her your unused exemption, rather than leave the property in a trust that will bypass your spouse’s estate upon his or her death. For some, this is attractive because the spouse will receive the property outright, without the encumbrance of a trust.

However, we have concluded that a bypass trust is well worth the benefits that it brings. First and foremost, the “portability” of the exemption is currently temporary. It may not be available after 2012. It also requires a post-mortem election on a timely-filed estate tax return, which puts a burden on the surviving spouse to make proper elections during a time in his or her life when such things may not be first and foremost in his or her mind. Most importantly, however, relying on a portable exemption entirely ignores the opportunity to mitigate estate taxes on future appreciation.

Using a simple example, if a decedent has an estate worth $5 million, and an available federal estate tax exemption of $5 million, it appears at first blush to be a wash if the decedent leaves the $5 million estate outright to the surviving spouse and allows his or her executor to transfer his or her $5 million exemption to the spouse as well. However, what is left out of the equation is the likelihood that the $5 million estate will very likely grow in value before the survivor dies. Again, for simplicity, let’s assume it grows to $7 million. The exemption that the surviving spouse received from his or her deceased spouse does not grow in value. So, the additional $2 million of appreciation will be subject to estate tax on the survivor’s death (assuming that the survivor’s own exemption is not available to offset that appreciation).

By contrast, had the $5 million been placed in a properly drafted and administered bypass trust for the benefit of the surviving spouse, all future appreciation would accrue in that sheltered trust. Therefore, the entire $7 million would escape estate taxation upon the survivor’s death. In our opinion, the typical bypass trust imposes very little practical restriction on the survivor’s ability to derive support and enjoyment from the trust assets. We are encouraging all of our clients to continue to deploy traditional trust planning, and to keep those trusts up to date in terms of documentation and funding.

Federal Gift Tax Exemption

The federal gift tax exemption will remain at $5 million for 2012 (actually, it will be adjusted for inflation to $5,120,000). Whether the exemption will remain at that level beyond 2012 is very uncertain. Bills have been introduced to lower it, and, without action by Congress before the end of 2012, the exemption will return to $1 million (but will be indexed for inflation) as of 2013. Because of the latter possibility, we are encouraging our clients to consider making large scale gifts during calendar year 2012.

Federal Section 7520 Rate

The federal section 7520 rate, which is the rate used to value retained interests in gift transactions, will be an astonishing 1.4% for January, 2012. This is a historic low. For certain gift planning techniques, such as grantor retained annuity trusts (GRATs), this presents a tremendous opportunity to leverage discounting of the gift component of the transaction. This historic low in interest rates and a historically high federal gift tax exemption will make early 2012 a tremendous time to be making large scale gifts.

Federal Generation-Skipping Transfer Tax

The federal estate and Generation-Skipping Transfer (“GST”) Tax exemptions will also be $5 million for 2012 (and will also be indexed for inflation so that they are actually $5,120,000). The annual exclusion for gift tax purposes will remain at $13,000.

New Hampshire Uniform Trust Code, Property Tax Abatements

In state legislation, this year brought us another round of refinements to the Uniform Trust Code, primarily making it easier to appoint multiple fiduciaries of trusts, such as trust protectors and trust advisors, and to precisely define their authority and liability exposure. The legislature also passed a bill making it clear that residences transferred to revocable trusts still qualify for various property tax abatements, such as those for disabled veterans, the elderly and the blind.

IRS CIRCULAR 230 NOTICE – To ensure compliance with IRS requirements, we inform you that any tax advice contained in this communication (or in any attachment included as part of this communication) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.