For 2011 and 2012, we have an estate tax with a 35% rate and a $5 million unified-credit exemption equivalent. That means that if you have an estate of under $5 million, there will be no federal estate tax.
For all wills and trusts that have been drafted with any type of formula clause, whether it is a marital-deduction formula clause or a child deduction formula clause, you have got to be very, very careful because you have a $5 million unified credit in effect now. The [generation-skipping-tax] exemption has also been bumped up to $5 million.
One should not to rely on something called portability. This is the notion that the surviving spouse can use an exemption amount that was not used by the first spouse.
You have an enhanced exemption, and it is a terrific opportunity, for families that can afford it, to think about lifetime gifts that take advantage of what is now a $5 million exemption for 2 years. That is a huge opportunity, and unless Congress acts, it will go away. This means that a $5 million lifetime gift can be made free of gift tax, free of estate tax, and grow permanently for the benefit of your family members, even if that means skipping a generation.
In 2010, we had a $1 million gift tax exemption, and now for the next two years, it is $5 million. Many people used their $1 million exemption, but now they have an additional $4 million to use. I think we are seeing a lot more gifting opportunities.For 2011 and 2012, you have “stepped-up basis” which is not really an accurate term. You get basis based on the value at date of death or valuation date. But if it is given away, then it has a gift basis, which is the basis in the hands of the transferor, which is the purchase price as reduce by any depreciation. And that is where you can have the income tax issue. So it is more important to look at specific assets and determine which are the best assets to gift and which are best to retain in the estate.