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With taxes in flux, estate planners try to make heads or tails

By BARBARA L. JONES, Dolan Media Newswires

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Nothing is certain but death and taxes – but right now, estate taxes are anything but certain.

The Tax Relief Act of 2010, signed into law on Dec. 17, 2010, increased the estate and gift tax exemptions and reduced the tax rates, but the measure contains a sunset provision that will increase the rates and reduce the exemptions in 2013.

That is, unless Congress changes it again.

Given the uncertainty, “the need for careful estate planning hasn’t changed, in fact, it has become greater,” said Minneapolis attorney Christopher J. Burns. For example, many estate plans simply refer to bequests that can be made tax free. That may need to be clarified, Burns said.

Additionally, any document that has a formula clause tied to federal estate tax amounts should be reviewed, he said.

The temporary nature of the law makes planning especially problematic.

“We know what to do in 2011 and 2012 but that’s all we know,” said Minneapolis attorney Susan Link, chair of the Minnesota State Bar Association Probate and Trust Law Section. Changes made now could have to be modified again soon.

What lawyers can do now is get up to speed on the new law, reach out to their clients and keep their eyes and ears open for developments, said Minneapolis attorney Bridget Logstrom Koci.

Lawyers agree that the act requires a review of many estate plans. Most of the impact will be felt on estates between $2 million and $10 million, Nelson said. If an estate is under $2 million there are basic planning steps that can be taken, but the options likely will be limited by the need to protect the funds for the use of the client, and the scenario hasn’t changed much for estates over $10 million, although the tax rate has dropped, he said.

“The [new tax] law changes the dynamic for that gap [between $2 million and $10 million],” Nelson said.

One option for those clients is to transfer money to reduce the size of the estate. The outlook is rosy for the lucky individuals and institutions that are the objects of that generosity, because the federal gift tax exemption went up in 2010 from $1 million to $5 million.

That change will likely lead to an “unprecedented amount” of gifting, Burns said.

The exemption will last through 2012 but may expire after that. “This is a huge opportunity to transfer wealth during the [client’s] lifetime so that the growth passes to the younger generation [and out of the estate],” said Minneapolis attorney Laura Carlson.

The generation-skipping tax exemption has also increased – it is now $5 million with a 35 percent tax rate.


Portability provided

Another significant change to federal law is that the estate tax exemption is now “portable.” Previously, although married couples were each allowed a full estate tax exemption, unless the parties’ attorneys created a trust to protect that exemption in the event of the first spouse’s death, the full use of the exemption was lost if the estate was left to the surviving spouse.

Under the new law, the exemption is portable – after the death of the first spouse, his or her exemption is transferred to the surviving spouse to be applied to the future estate.

That makes clients who don’t want to set up a trust happy, said Carlson. “It’s exciting when you tell people they don’t have to spend money on a lawyer.”

But the exemption isn’t for everyone, and some spouses will still want a trust so the estate goes to the children and not a second spouse, Carlson cautioned.

The portability change raises other issues. For one thing, lawyers aren’t sure how to claim the exemption, Nelson said.

The federal government is supposedly going to issue a form that can be used, he said. But Link said an estate tax return may be required to claim the exemption, which would be a big expense to the estate if the return would not otherwise have had to be filed.

There also may be cases where the exemption isn’t transferred because it is anticipated that the estate of the surviving spouse wouldn’t be big enough to use it, Nelson noted.


What about 2010 deaths?

Questions still remain about how to handle the estates of clients who died last year.

Until Dec. 17, “We had no idea what to do with the estates of people who died in 2010,” Link said.

And there is still uncertainty, because under the act the personal representative can choose between the old law and the new law. An estate could file under -the new law and claim the $5 million exemption and inherited assets would have the benefit of a stepped-up basis. Under the old law, the estate could pass free of tax, but the assets would have to keep a modified carryover basis, Koci said.

There are no forms available yet to file using the modified carryover basis, she noted. Tax returns will be due in September, nine months after the passage of the law.

Editor’s note: This article first appeared in Minnesota Lawyer, which The Dolan Company also owns.


Highlights of the 2010 Tax Relief Act


  • Estate tax, gift tax and generation-skipping tax exemptions increased to $5 million, with a 35 percent rate.
  • 2010 estates may elect to rely on the new law or pre-existing law.
  • Unused federal estate tax exemption may be transferred to a surviving spouse.
  • The law sunsets on Dec. 31, 2012, and the exemptions go back to $1 million and a 55 percent tax rate – a return to 2001 levels.

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