Press Room: Tax Release

November 02, 2011

Use It Or Lose It

The federal estate and gift tax system has experienced a significant number of changes in recent years, and its future has been the subject of rumors and speculation. The latest of these rumors is that the Joint Select Committee on Deficit Reduction (the “Super Committee”) will make a recommendation to revert to the estate and gift tax rates and exemptions that were in place in 2009. The deficit reduction recommendations are scheduled to be released on November 23, 2011. This change would reduce the lifetime exemption from the gift tax from its current level of $5 million to $1 million, eliminating a substantial planning opportunity that exists today. 

Until Congress enacts a long-term extension or reformation of the current estate and gift tax system, the rumors and speculation will persist. Rather than add to the speculation about what might happen, we would like to highlight the following facts that suggest it is advisable to address your wealth transfer plans sooner rather than later in order to take advantage of the current $5 million gift tax exemption.

  • Without further legislative action, the current structure of a $5 million exemption and 35% rate will revert at the end of 2012 to pre-2002 levels with a $1 million exemption and a 55% rate. This extraordinary increase in rates and reduction of exemptions is scheduled to occur based on the current law and requires no further action from Congress.
  • For several years, the Treasury Department has consistently recommended changes that would substantially reduce the effectiveness of many planning techniques. The current focus on deficit reduction could result in these recommendations receiving increased attention and consideration. Most notable among these is to significantly reduce the availability of valuation discounts applicable to transfers of limited partnership interests and other minority interests in family controlled entities. These changes would substantially increase the tax cost associated with many transfers of wealth, even if there are no changes in the current exemptions and rates.
  • The benchmark interest rates that are required to be used in many estate planning transactions are at unprecedented low levels. For example, the November rate used for techniques such as Grantor Retained Annuity Trusts and Charitable Lead Annuity Trusts is 1.4%. Low rates mean lower transfer taxes and these rates simply cannot get much lower, making this an optimal time to implement transactions that use leverage to transfer value over time.
  • The current volatility in the financial markets results in very favorable valuations of interests in closely-held entities for transfer tax purposes.
  • Many consider it unlikely that there would be a sudden adverse change in legislation; however, it is noteworthy that the legislation implementing the current favorable structure was enacted suddenly last December without any significant public discussion, and it was not anticipated by even the most seasoned lobbyists. Considering the current environment and the emphasis on deficit reduction, it is certainly plausible that Congress could very quickly enact legislation that would have substantial adverse impacts on the estate and gift taxes applicable to standard wealth-transfer techniques.
  • Transferring assets sooner rather than later almost always generates a better result because it allows the growth in value of the assets transferred to escape taxation in the transferor's estate.

If you wish to minimize the impact of estate and gift taxes, we urge you to consider planning that would take immediate advantage of the current $5 million gift tax exemption before events occur that could substantially reduce the potential benefit currently available. Please contact your WTAS advisor to discuss the most prudent ways to ensure that you and your family receive the most benefit from the current opportunity.