Technology Century V.17 N.1 - ESD

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LAWNew Estate Planning Law:Opportunities & CaveatsBY THOMAS E. OWEN &VINCENT DEMARCOOn December 17, 2010, a new tax law wasadopted that changed the existing federal gift,estate tax, and generation-skipping tax laws.By its own terms, this new law is effective onlythrough December 31, 2012, at which pointthe “old” tax law will supposedly be reinstated.The old law dates back to 2001, with the ratesand exemptions in effect then. The changescontained in the tax law for 2012 present new estateplanningopportunities and may cause problems withsome existing estate plans.GIFT TAXIn 2012, as before, you may give an unlimited numberof donees a gift up to the amount of the annual gift taxexclusion without incurring any gift tax or using upany of your estate and gift tax exemption. The amountof the annual exclusion for 2012 is $13,000. If yourspouse contributes to the gift, the value of the gift canbe doubled to $26,000. (As before, you can still payeducation and medical expenses for another with gift-taxconsequences.)In addition, for 2012 the amount of the gift and estatetax exemption has been increased to $5.12 million. Thismeans that you would not incur gift-tax liability untilyour lifetime total of taxable gifts exceeded $5.12 million.While this may not be relevant to all readers, there aremany for whom this presents a welcome estate-planningopportunity and one that was not available before 2011and may not be available after 2012.48 | <strong>Technology</strong> <strong>Century</strong> | SPRING 2012
ESTATE TAXThe upward change in the amount of the gift andestate tax exemption affects estate tax as it doesthe gift tax on lifetime giving. The practical effectof the $5.12 million exemption is that no tax willbe assessed on taxable estates of less than $5.12million. That means that for almost everyone, estatetax would be eliminated from consideration in theirplanning. The fly in the ointment of that planning isthat the $5.12 million exemption, under current law,is scheduled to expire on December 31, 2012. UnlessCongress acts before then, the pre-2001 rates willcome back into effect.Under the old law, the amount of the exemptionwas $1 million and the tax on the taxable portion ofan estate (that which exceeds $1 million) was at 55%(higher for some estates). At this time, it is not possibleto know what Congress will do. Congress allowedthe estate tax to disappear completely for 2010, tothe surprise of everyone. There is sympathy in someparts of Congress for making such a repeal permanent.Others have suggested reverting to pre-2010 status, ofa $3.5 million exemption and 45% tax rate. Perhapsthe present law will be extended. Then again, perhapsthere will be no agreement in Congress, and the 2001law will be reinstated. Careful planning requires thatyour estate plan be flexible enough to deal with any ofthese possibilities.A CAVEATIf your existing estate plan provides for the fundingof the “credit shelter” trust first and a spouse’s trustsecond, you may wish to consider the effect of thatdirection in the light of the $5.12 million exemption. Itmight cause the entire trust estate to be placed in thecredit-shelter trust, and nothing, or very little, in thespousal trust. If you have any questions, contact yourestate-planning advisor.PORTABILITYAmong the features introduced in the current law isthe opportunity for portability of the deceased spouse’sunused exemption amount (DSUEA). Heretofore, anyportion of the deceased spouse’s estate tax exemptionthat was not necessary to wipe out the estate tax in thatspouse’s estate was lost. It disappeared. Under portability,the surviving spouse can add that amount to his or herown exemption amount. To achieve portability, an estatetax return must be timely filed, even though it might nototherwise be required, and there are an abundance ofqualifications and requirements, as set out in the statutesand regulations, and certainly more will be developedthrough IRS rulings and court decisions.As noted, the estate and gift tax law in effect for 2012has introduced significant changes, some of which wereexplained in this article. Other issues, such as changesto the generation-skipping tax, are not addressed in thisarticle due to space considerations. As always, consultyour estate-planning advisor for more information onyour particular situation.Tom Owen (left)and Vince DeMarcoare engineers atheart, having earnedengineering degreesat Michigan andMichigan State,respectively. Owen& Demarco, PLC, islocated at 20 W. Washington, Suite 3, Clarkston, Mich.,48346. They can be reached at 248-642-1240 orowenlaw@comcast.net.www.esd.org | The Engineering Society of Detroit | 49
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