Editor’s Note: Carrie B. Cline is a member of the Trusts and Estates Practice Group at Ward and Smith, P.A.

Prior to year-end 2010, President Obama signed into law “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (“Act”). Among other things, the Act drastically changed the tax rules regarding the transfer of property by gift or at death for 2011 and 2012. This article summarizes portions of the Act and highlights planning opportunities that you should consider in light of these changes and the current economic environment.

The Federal Transfer Tax Laws for 2011 and 2012

The following summarizes how the federal estate, gift, and generation-skipping transfer (“GST”) taxes will apply in 2011 and 2012:

Estate Tax. The estate tax exemption has been set at $5,000,000, meaning that the first $5,000,000 of a decedent’s estate will be free of any tax. Absent an applicable deduction, assets in excess of this amount will be subject to federal estate tax at a 35% rate.

Gift Tax. The gift tax exemption has been raised to match the estate tax exemption, meaning you can make up to $5,000,000 in lifetime gifts without the imposition of tax. (Those lifetime gifts, however, will reduce the amount that you can leave estate tax-free at death.) Gifts in excess of the exemption will be subject to tax at a 35% rate.

GST Tax. The GST tax, which is imposed on certain transfers benefiting generations more than once removed from you (your grandparents’ or earlier generations or your grandchildren’s or later generations), will be applied at a 35% rate. The tax, however, applies only to GST transfers in excess of the $5,000,000 lifetime exemption.

Portability of Estate and Gift Tax Exemptions. If you or your spouse dies during 2011 or 2012, the deceased spouse’s unused estate and gift (but not GST) tax exemptions can be added to the surviving spouse’s exemptions. To make use of these portability provisions, the deceased spouse’s estate must make the requisite election on a timely-filed estate tax return.

These rules and exemption amounts (which are indexed for inflation) will apply for 2011 and 2012 only. Absent extension legislation, the federal transfer taxes will become much less taxpayer-friendly beginning in 2013.

Planning Opportunities for You

The new transfer tax rules and the current economic environment may make certain estate planning strategies especially appropriate for you at this time.

Gifts. Given the considerable increase in the gift tax exemp¬tion, certain wealthy indi¬viduals should consider making significant gifts during 2011 or 2012. This strategy is advantageous because gifting allows future appreciation to occur outside of the donor’s taxable estate – thus preventing later estate tax. Because many asset classes (such as real estate) are down in value right now, this strategy is especially timely. The use of “discounts” if the gifted asset is an interest in an LLC or other closely-held entity can leverage these gifts even further.

Intra-Family Loans and Grantor Retained Annuity Trusts (“GRATs”). Interest rates currently are low. To take advantage of this environment, it may be appropriate for some individuals to make loans to family members in exchange for interest-bearing notes. The assumption is that the borrowed funds can be invested and will out-perform the interest charged on the loan which will result in a net transfer of wealth to the family member with no tax. Many people also like this technique because their principal ultimately is paid back to them, often over a short time period.

A GRAT works in a manner similar to the intra-family loan, except it involves a trust and the asset being lent is not cash. Another difference is that the taxpayer must out-live the GRAT’s repayment term for the trans¬action to succeed.

Charitable Lead Annuity Trusts (“CLATs”). The low interest rate environment may make a CLAT another attractive planning opportunity for you. A CLAT operates in a manner similar to a GRAT, but the annual annuity is paid to one or more charities. There is no mortality risk with a CLAT, so the term can be longer. If you routinely make charitable gifts on an annual basis, a CLAT could be a more tax-efficient way for your gifts to be made.

Sales of Assets. The Act extends the so-called Bush tax cuts with respect to long-term capital gains, and you may want to take advantage of the opportunity to sell assets in order to realize gains at a favorable 15% federal rate.

Sales to Special Trusts. Another strategy you might consider is to sell assets to special trusts you establish for the benefit of your family members. These sales are designed to take advantage of several factors discussed above (depreciated asset values, discounts, and low-interest rates) to achieve significant transfer tax savings. If this strategy is appropriate for you, you should complete these transactions as soon as possible because of potential Congressional action that would limit the transactions in the future.

General Revisions to Your Estate Plan. Finally, you should request a review of your existing estate planning documents to confirm that the documents (1) make sense given the changes to the federal transfer tax laws and (2) are reflective of your current intent. In addition, your beneficiary designations for retirement plans and life insurance need periodic review to ensure the designations are consistent with your overall estate plan.


New federal transfer tax rules and current economic conditions make this an excellent time for you to consider estate and tax planning. The convergence of favorable rules and conditions, however, is not permanent, and time is of the essence. If you act now, you can potentially achieve long-term savings for your family .

© 2011 Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Carrie B. Cline practices in the Firm’s Trusts and Estates Practice Group. Comments or questions may be sent to cbc@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.