Estate and Gift Planning in Times of Turmoil



Let’s see: the stock market moves like a yo-yo on an hourly basis, the national political climate is as clear as mud, and Maryland has seen an earthquake, a hurricane, and flooding all in the span of a few short weeks. Doesn’t seem like a great time to be thinking about significant estate and gift planning?  In fact, a combination of factors makes this the perfect time to consider such planning.

After almost an entire year of uncertainty regarding the estate and gift taxes, Congress finally enacted temporary legislation to reinstate the estate tax.  Somewhat surprisingly, Congress also dramatically increased the estate and gift tax exemptions to $5 million. Remember that before the “fix,” the estate tax exemption in 2009 was $3.5 million per person and the gift tax exemption was $1 million per person. As with most of what comes from Congress, however, there are positives and negatives to these adjustments.

On the negative side, these new estate and gift tax provisions are only in effect until the end of 2012. The significant benefits of the increased exemptions are unfortunately temporary. As we learned through the end of 2009 and most of 2010 (oh, and don’t forget the debt-ceiling debacle…), Congress is not in a particular hurry to address time-sensitive issues. So although we would hope for a long-term, comprehensive review of the estate and gift tax regime, it is doubtful that we will see such clarity. Thus, as we look forward in the estate-planning context, it is difficult to predict what the rules will be beyond December 2012.

Benefits of Current Gifting

There are compelling positives, though, in our current climate. First, although we are almost one year into the two-year window of higher estate and gift tax exemptions, there is still plenty of time to take advantage of the $5 million exemption. For families and individuals with the surplus capital to make significant gifts, this two-year window presents a potentially unique opportunity to transfer valuable assets to the next generation with minimal gift tax consequences. Not only does making a significant gift remove the asset from the donor’s estate, but it also removes the future appreciation of that asset from the donor’s estate as well.

Historically Low Interest Rates

Second, IRS official interest rates are at historic lows. The 7520 rate and the Applicable Federal Rates, which are integral to many interest-sensitive estate and gift-planning techniques, are literally as low as they’ve ever been.  For individuals seeking to make a transfer to the next generation (or generations) using intra-family loans or sales to grantor trusts, the low interest rates may enhance the extent to which such gifts can be leveraged.

These historically low rates are of particular advantage to an individual or family considering selling a business in the coming years. There are many effective means by which interests in a family business can be transferred to the next generation (or, say, a trust for the benefit of future generations) in a tax-efficient way prior to the contemplated sale. Such transfers can be structured so that the gift is discounted for gift-tax purposes. When the business is ultimately sold, the beneficiaries of the gift end up with considerably more than the appraised value of the gift. This type of planning requires careful advance consideration, but can prove to be extremely beneficial to the family business owner.

The Maryland Estate Tax

Third, for Maryland residents, the increased ability to make significant gifts under the Federal gift tax exemption allows individuals and families to further reduce their estates for Maryland estate-tax purposes. Remember that despite the increases to the Federal exemptions, the State of Maryland has retained its $1 million exemption for Maryland estate-tax purposes. There is no Maryland gift tax, so reducing the Maryland estate-tax base through gifting can save significant amounts of Maryland estate tax.

The existence of the Maryland estate tax also underscores the continuing need for trust planning within the context of basic estate planning. One of the features of the new estate and gift-tax legislation is the concept of “portability” of estate-tax exemptions – meaning that if one spouse dies and his or her entire estate-tax exemption is not used, the surviving spouse may assume the rest of that exemption. For example, Husband dies in 2011 with an individual estate of $2 million. The $3 million of his estate-tax exemption that goes unused can be transferred to Wife, who now has an $8 million exemption of her own. Because of this new feature, many families may think that there is no further need for tax-planning trusts within their basic estate planning.

Despite the potential benefits of portability, significant reasons remain to consider using tax-planning trusts. First, there is no guarantee that portability of exemptions will remain part of the estate and gift-tax planning regime.  Although the White House has mentioned making the portability feature permanent in its 2012 revenue proposals, there is no guarantee that this easily manipulated provision will become permanent. Second, leaving all of your assets to your surviving spouse outright does not guarantee that the value of those assets will always be covered by your combined exemptions. When assets are distributed to a properly structured credit-shelter trust, the value of those assets is not taxed in the donor’s estate and is not subject to estate taxes at the survivor’s death. If those assets are left outright to the surviving spouse, though, they are subject to the Maryland estate tax on the survivor’s death, and the appreciation on those assets may ultimately exceed the spouses’ combined exemptions for Federal estate-tax purposes. Finally, all of the traditional benefits of using trusts – enhanced asset management, spendthrift protection, protection from financial predators – still hold true and are of significant benefit in planning.


We head into the latter part of 2011 knowing that the estate and gift-tax climate is far from certain. However, what we do know about current circumstances presents significant possibilities to transfer wealth to future generations in a tax-efficient manner. Current law has provided individuals with an increased ability to make gifts, which, combined with low Federal interest rates, presents a unique opportunity to make significant leveraged gifts. The time is right for advanced planning, but be aware that the window of opportunity may be closing.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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