The last minute compromise which averted the expiration of the Bush tax cuts included a two-year modification of the estate, gift, and generation-skipping taxes. For 2011 and 2012, every individual will have a $5 million gift tax exemption. For individuals dying in 2011 or 2012, the estate tax exemption is also $5 million, and the generation-skipping transfer (“GST”) tax exemption for transfers during life or at death is $5 million. These exemption amounts are reduced by any amounts applied to the gift tax exemption or the GST tax exemption in prior years. The tax rate is 35% for transfers, estates, or GST transfers in 2011 and 2012.

This tax law also introduced “portability” into the estate tax law for the first time, permitting a surviving spouse to utilize the unused estate tax exemption of a predeceased spouse. The portability provisions will be most beneficial for estates between $5 million and $10 million where the first spouse to pass away leaves his or her entire estate to the surviving spouse; otherwise, the portability provision has fairly limited planning uses.

Unfortunately, these changes only apply for two years. In 2013, the estate, gift, and GST tax exemptions are scheduled to return to $1 million, and the top marginal rate will increase to 55% (and 60% for some estates). Congress is likely to act before 2013 to either extend the 2011 rules described above for an additional period of time, or to make permanent an exemption between $3.5 million and $5 million and a top marginal rate of between 35% and 45%.

As a result, for a married couple with an estate in excess of $10 million, we generally recommend that they consider additional planning opportunities to transfer current assets to younger generations or transactions that will freeze their estates and allow future growth to be transferred to younger generations free of transfer taxes. Since the GST tax exemption is also $5 million per spouse, this opens an opportunity for establishing substantial generation-skipping trusts that can be used for children, grandchildren, and future generations.

We believe this is a good time to consider making transfers (by gift, sale, or a combination of both) of discounted assets such as fractional interests in real estate and minority interests in closely held businesses, and appreciating assets. Also, these gift tax exemptions can be leveraged by making a gift of a personal residence into a qualified personal residence trust (“QPRT”), transferring appreciating assets to a grantor retained annuity trust (“GRAT”), and selling interests in closely held businesses to trusts that are exempt from the GST tax. Since IRS interest rates remain very low (February nine-year loan rate is 2.33%), GRATs and loans remain very attractive.

We are hosting a presentation on opportunities under the new tax law in our Dallas office on February 23 at 8:00 a.m. and invite you to attend. Please click here for more information or to register for the presentation. We will also be making this presentation in Fort Worth and Houston sometime in March or April. If you would like to receive an invitation to either of our upcoming presentations, please send an email to Cari Peretzman or call 214.651.5965.

If you have any questions on this alert, please feel free to contact one of the attorneys listed below.