Pub. 3 2012 Issue 2

www.wvbankers.org 12 The 2010 Tax Act contains significant changes to our tax laws including the areas of income, capital gains, gift, estate and payroll taxes. This article is delimited to gift and estate taxes. T his Act provides some unique opportunities for those with sub- stantial estates to pass onto their heirs or to others, significant assets, while legally avoiding heavy taxes. Many of the provisions of this Act are scheduled to expire on December 31, 2012. Of course, our government may modify and extend, but there is no guarantee that such will happen. This new law “reunifies” the federal estate, gift and generation-skipping transfer exemptions to $5,000,000 per person for 2011 and 2012. This means that lifetime gifting opportunities have increased from the previous $1,000,000 level. The tax rate above the $5,000,000 threshold is 35%. In 2013, the estate and gift tax exemptions are scheduled to drop back to $1,000,000 per person. Under the 2010 Tax Act, a surviving spouse may “elect” to use any unused exemption of the first spouse to die. This provision is available in 2011 and 2012 and requires that an estate tax re- turn be filed at the first spouse’s death. In the past, trusts — often referred to as by-pass trusts or credit shelter trusts — were set up to utilize the estate tax exemption of the first spouse of a mar- ried couple to die. Assets transferred to these trusts at the death of the first spouse were “by-passed” or “sheltered” from estate taxation at the death of the second spouse. While this new portable provision of 2010 Tax Act has the potential to help simplify estate tax planning for mar- ried couples, it should be noted that there are benefits to using a by-pass or credit shelter trust that the portable ex- emption strategy does not offer. These include creditor protection and keep- ing the appreciation of trust assets out of the second spouse’s taxable estate. Note that the taxpayer must choose either the portable provision of the 2010 Tax Act or the older credit shelter trust provision. Obviously, the above is complex and most taxpayers should involve his or her entire financial team in this planning. Contrastingly, following are three noteworthy opportunities that prevail as this is written, opportunities rela- tively easy to understand: • Gift tax: The new $5,000,000 per person gift tax exemption presents an opportunity for substantial tax- free gifting in 2011 and 2012. This exemption has never been this high. • Estate tax: Although the estate tax exemption has also been increased to Estate Tax Planning Opportunities Going Away December 31, 2012 By Chuck Smith, CPA, Founding Member, Smith Cochran & Hicks, PLLC