On December 17, 2010, Congress passed a new estate tax law which unifies the estate tax and gift tax exemptions, increases the federal transfer tax and Generation-Skipping Transfer Tax (GST tax) exemptions to $5 million per person, caps the highest marginal tax rate at 35%, and adds a concept called “portability.” Unfortunately, the law is only effective until December 31, 2012, and unless Congress acts sooner, the estate tax law will revert to 2001 levels ($1 million exemption and 55% marginal tax rate) on January 1, 2013.
The Connecticut estate tax also changed in 2011 when the estate and gift tax exemption was increased to $3.5 million on January 1. However, due to state budget issues, the exemption was soon reduced to $2 million.
New York State does not have a gift tax. The New York estate tax exemption is $1 million. For New York residents (as well as residents of other states without a state gift tax), lifetime gifting may result in significant New York estate tax savings at death.
As was the case in 2010, we can once again expect that Congress will act (if at all) at the end of 2012. While clients may decide to “wait and see” what Congress does before making changes to their estate and tax planning strategies, it is important to consider planning options well in advance.
1. Gift to Spousal Trust. Consider making a current gift to a trust which benefits your spouse and children. Such a trust would allow you to move assets (and any future appreciation) out of your taxable estate and yet still give your spouse access to the funds if needed.
2. Gift of Non-CT Real Estate. Real estate located outside Connecticut is not subject to Connecticut gift tax. Therefore making a gift of a vacation home outside the state to your children or to a trust for future generations would only be subject to federal transfer tax. In addition, setting up a trust for real property now would allow you to establish a mechanism for future use and upkeep of the property.
3. Insurance Trust. Consider providing for children, grandchildren and generations beyond with a single premium insurance policy. A large one-time gift to the trust will cover future premiums and simplify the allocation of any GST tax exemption.
By doing their homework today, clients can be ready to respond to rapid changes and potentially short windows of opportunity in which to act. For more information, please contact Heather J. Lange (hlange@brodywilk.com).