New Tax Law Shifts Focus of Estate
 Planning Techniques

Enactment of new estate tax law has not changed income tax issues or estate planning techniques, but it has changed the focus on which techniques are most appropriate.

Individuals now have the ability to make $5 million in taxable gifts without having to pay any federal gift tax.  However, for Connecticut residents, the threshold for having to pay Connecticut gift tax remains at $3.5 million. The recently released proposed budget of Governor Malloy includes provisions to reduce that amount to $2 million.

For instance, it may have been advantageous for an individual with a certain net worth to engage in a grantor-retained annuity trust ("GRAT") or an installment sale prior to the passage of the Tax Relief Act of 2010, but a simple outright gift might now be better.

The new law has no "claw back" tax obligation for people who make gifts in 2011 and 2012 that exceed their post-2012 estate tax exemption allowance. If an individual makes a $5 million taxable gift there will be no further tax on that $5 million, even if rates go up and the unified credit goes back down to $1 million as it is presently scheduled to do on January 1, 2013.

Under the new law, every individual has a new $4 million federal gift tax exemption allowance.  Even if the individual previously gave away $3 million and paid gift tax, the individual receives the additional allowance. 

A big question for 2011 and 2012 planning is whether individuals should make use of that allowance while it is available, even if it might generate some Connecticut gift tax liability.

The new portability allowance will also allow surviving spouses to use the first dying spouse's federal estate tax exemption. However, since Connecticut does not have a similar rule, using the portability allowance will not work nearly as well as a "credit shelter trust". 

For estates of decedents who died during 2010, there is a choice of electing into the "carryover basis regime" ( the "repeal" of the estate tax rules) or using the new estate tax rules for federal estate tax purposes. 

The default rule for decedents who died in 2010 is the new estate tax rules with the estate tax exemption of $5 million and a maximum estate tax rate of 35%. Under the carryover basis regime, the decedent's estate can allocate up to $1.3 million of basis toward any phantom gain in assets in the decedent's estate. If the decedent was married, the estate gets an additional $3 million to allocate to any assets left outright to a surviving spouse or a trust for the spouse.

For estates under the $5 million amount, the decision to use the new estate tax rules should be easy.  For estates over the $5 million amount the decision will be more difficult and will require some detailed analysis.