Why You Should Evaluate the Financial Condition of Your Life Insurance Companies

The recent U.S. government rescue of AIG should serve as a reminder of how important it is to evaluate the strength of the life insurance company(s) that issued your policy(s). Many other insurance companies have also incurred losses and have had their ratings downgraded.

There are steps you can take to make sure you do not lose your coverage or access to your cash values after years of making many premium payments.

1. 1. Have an objective professional evaluate the strength of each of your insurance companies based on:
      1. 1. Their existing investment portfolio;
      1. 1. Claims paying ability; and
      1. 1. Administrative and mortality costs.

      A weakness in any of these criteria can create significant exposure. Is your company artificially paying too high a dividend? While some insurance companies do this in order to maintain business, doing so erodes reserves and can lessen the company’s ultimate claims paying ability. One way an insurer can pay too high a dividend without adversely impacting the company’s ultimate claims-paying ability is to over-charge for overhead costs and/or mortality. Are you being overcharged for overhead costs or mortality charges? An analysis can determine if you are overpaying.

   2. Be sure your insurance company is licensed by your state. Even if the government doesn’t step in, you have a certain amount of coverage guaranteed by your state.

1. 1. After an analysis is complete, it may make sense to purchase new policies from companies in better financial condition and with lower costs. However, if you surrender an existing policy, you need to be careful not to trigger surrender charges and be mindful of potential income tax consequences. There are strategies available to exchange your current policies and avoid gain recognition. It is also possible to borrow against your cash value policies and safeguard the cash if the insurance company is in a difficult financial position.

In addition to the issues discussed above, you may simply have changes in your personal and professional life that impact your need for life insurance coverage. Perhaps you have too much insurance based on your current net-worth or too little if you have young children.

We can assist in helping you navigate these complicated issues. It is extremely important, however, not to cancel a policy before being approved for another. Please contact us to discuss a review of your life insurance plan as soon as possible.

In this grim economic climate where the value of so many assets are depressed, you may be finding many investment opportunities. If you make the investment yourself or retain an asset whose value has declined, the asset you hold and all future appreciation will grow in your gross estate and will therefore be subject to estate taxes at your death, robbing your family of anywhere up to 55% of its value.

If you are making a new investment, why not instead loan the necessary cash to your children or grandchildren and allow them to make the new investment in your place? Provided you charge a minimum amount of interest equal to the applicable federal rate (the “AFR”) published monthly by the IRS* , there will be no gift tax consequences. This is particularly advantageous if you have already used your lifetime gift tax exemption. Your child or grandchild will give you a promissory note calling for interest only during the loan term you choose with a balloon principal payment at the end of the term (the interest rate can be locked in based on current low rates). By that time, the investment should have appreciated sufficiently to pay off the note. Meanwhile, the investment and its appreciation have been growing outside your gross estate, and will therefore not be subject to estate taxes at your death. The same theory applies to assets you currently own that have depressed values and are expected to appreciate. Why not remove these assets from your estate now?

Having assets owned by trusts can substantially enhance tax planning benefits. Many of you have created grantor trusts for the benefit of your descendants. A loan to a grantor trust has many advantages. Once again, all appreciation on the investment purchased directly by the trust will not be included in your gross estate. Even if you die before the promissory note is repaid in full, only the outstanding balance will be includable as an asset of your estate for estate tax purposes, not the full value of the appreciated investment. An added benefit to using a trust is that your descendants will be provided with asset protection in the event of a divorce or lawsuit as long as the investment remains in trust. Furthermore, you, as the grantor of the trust, will continue to pay income tax on all income earned by the assets held in the trust, as you and the trust are considered identical for income tax purposes, meaning that the assets you’ve set aside for your descendants will grow continuously without reduction for income taxes; nor will you be required to report and pay income tax on the interest paid to you by the trust. The income tax that you pay for the trust is a tax free gift!

We strongly encourage you to look on one of the few bright sides of the current economic environment and take advantage of it for estate planning purposes. It is generally believed that interest rates will soon begin to rise. Inflation may also increase valuations. If you have a business or real estate investment with a current low valuation which you expect to appreciate in value or plan on making a new investment, take action immediately, before these opportunities disappear!

In this grim economic climate where the value of so many assets are depressed, you may be finding many investment opportunities. If you make the investment yourself or retain an asset whose value has declined, the asset you hold and all future appreciation will grow in your gross estate and will therefore be subject to estate taxes at your death, robbing your family of anywhere up to 55% of its value.

If you are making a new investment, why not instead loan the necessary cash to your children or grandchildren and allow them to make the new investment in your place? Provided you charge a minimum amount of interest equal to the applicable federal rate (the “AFR”) published monthly by the IRS* , there will be no gift tax consequences. This is particularly advantageous if you have already used your lifetime gift tax exemption. Your child or grandchild will give you a promissory note calling for interest only during the loan term you choose with a balloon principal payment at the end of the term (the interest rate can be locked in based on current low rates). By that time, the investment should have appreciated sufficiently to pay off the note. Meanwhile, the investment and its appreciation have been growing outside your gross estate, and will therefore not be subject to estate taxes at your death. The same theory applies to assets you currently own that have depressed values and are expected to appreciate. Why not remove these assets from your estate now?

Having assets owned by trusts can substantially enhance tax planning benefits. Many of you have created grantor trusts for the benefit of your descendants. A loan to a grantor trust has many advantages. Once again, all appreciation on the investment purchased directly by the trust will not be included in your gross estate. Even if you die before the promissory note is repaid in full, only the outstanding balance will be includable as an asset of your estate for estate tax purposes, not the full value of the appreciated investment. An added benefit to using a trust is that your descendants will be provided with asset protection in the event of a divorce or lawsuit as long as the investment remains in trust. Furthermore, you, as the grantor of the trust, will continue to pay income tax on all income earned by the assets held in the trust, as you and the trust are considered identical for income tax purposes, meaning that the assets you’ve set aside for your descendants will grow continuously without reduction for income taxes; nor will you be required to report and pay income tax on the interest paid to you by the trust. The income tax that you pay for the trust is a tax free gift!

We strongly encourage you to look on one of the few bright sides of the current economic environment and take advantage of it for estate planning purposes. It is generally believed that interest rates will soon begin to rise. Inflation may also increase valuations. If you have a business or real estate investment with a current low valuation which you expect to appreciate in value or plan on making a new investment, take action immediately, before these opportunities disappear!

What is an IDGT?

Generally a trust is a separate taxpayer that reports its own income and pays its own tax. However, a Grantor Trust is a trust where the trust income is taxed to the grantor or creator of the trust rather than to the trust itself. There are basically two types of Grantor Trusts. One is a Revocable Trust such as a Living Trust which is used as a planning device to avoid probate. It does not save estate taxes. The other is an Irrevocable Trust used for estate tax planning purposes to save estate taxes by removing assets from the gross estate. The beneficiaries of the trust are typically the spouse and the grantor’s descendants. However, the trust is drafted in accordance with certain provisions of the Internal Revenue Code to have a “defect” that would cause the income to be taxed to the grantor rather than to the trust (even though the grantor is not a beneficiary of the trust). The attorney therefore drafts the trust to be intentionally defective so that the income earned by the trust is still taxed to (but not received by) the grantor even though the assets in the IDGT are not included in the estate of the grantor.

Why would I want to be taxed on income I don’t receive?

Great question. The answer is buried in two Revenue Rulings published by the IRS. Rev. Rul. 85-13 and Rev. Rul. 2004-64 have made clear that even though the grantor is paying the income tax on the income generated by the trust, the income tax payment is NOT an additional gift for income tax purposes. Thus, the IDGT can grow without reduction for income taxes.

Example:

Dad uses his $1 million lifetime gift tax exemption and transfers cash or an asset to an IDGT. We suggest funding an IDGT with a closely held business interest or a commercial real estate investment whose valuation on a discounted basis may have substantially declined because of the economy, but in spite of the economy, still has good cash flow. An alternative might be a private equity investment or IPO that is expected to appreciate in value.

Assume the rate of return is 10% so that the income generated is $100,000 per year. If the trust paid its own tax (and assuming no distributions out of the trust) there would only be $1,055,000 in the trust at the end of the year assuming a 45% income tax bracket (the original principal of $1 million plus $100,000 of income less $45,000 in tax). However, if the trust income is taxed to the grantor and the grantor uses other non-trust funds to pay the tax, there would be $1,100,000 in the trust at the end of the year instead of $1,055,000. The grantor is reducing his gross estate without any transfer tax consequences by using other funds to pay the income tax on behalf of the IDGT.

Assuming the grantor uses other funds to pay the income tax and no distributions are made from the trust, after 20 years, there would be $6.7 million in the IDGT versus $2.9 if it were a non- grantor trust. The difference of $3.8 million is in effect a tax free gift! If the principal or the rate of return is higher, the results are even more dramatic.

Now is the time to review your assets and investment opportunities to determine what assets would be appropriate for an IDGT. Given current low valuations of most assets, now would be a great time to implement or enhance your estate planning by creating an IDGT.

Act Now Before Estate and Gift Tax Rates Increase

Unless Congress acts, the estate tax will be reinstated beginning January 1, 2011. The estate tax rate is expected to be as high as 55% with an estate tax exemption of only $1 million. We do not anticipate Congress acting. By doing nothing, the White House can get an enormous tax increase and blame it on Congress and the Bush administration. If you do not take steps to move illiquid assets out of your estate, not only will a 55% tax likely be due (within 9 months of the date of death), but the real estate investments may have to be sold in order to pay the tax. Don’t let the government take the biggest share of your estate.

Real estate is typically owned in a Limited Liability Company (LLC) or Limited Partnership (LP). To move your interest in the LLC or LP out of your estate, we usually recommend first having the entity appraised on a discounted basis to reflect discounts for lack of marketability and minority interest. The service of a reputable appraiser is necessary. Simultaneously, you will create an irrevocable grantor trust for the benefit of the family. The grantor trust is funded with seed capital (usually through annual exclusion gifts or gifting a portion of the $1 million lifetime gift tax exemption). The seed capital must equal at least 10% of the sale price. Once the appraisal is complete, you will sell your interest in the LLC or LP (or a portion thereof) to the grantor trust in exchange for a promissory note. This sale is not a taxable event for income tax purposes.

As stated, the LLC or LP interest is sold to the grantor trust in exchange for a promissory note. If the note is less than 9 years, the IRS stated Applicable Federal Rate for November 2010 is only 1.59%. The cash flow going into the trust (now as the owner of the LLC or LP interest) will be used to pay down the interest and principal on the note. Once it is paid off, future cash flow can remain in the trust and grow outside of your estate (instead of accumulating in your estate and eventually being taxed at 55%).

A tremendous benefit of a grantor trust is that transactions between you and your grantor trust are not taxable. Thus, a sale of an LLC or LP interest to your grantor trust is not a taxable event. However, if an interest representing 50% or more of the underlying property is sold within a 3 year period, there can be NYS/NYC real property transfer taxes of about 3%. This can be avoided by selling less than a 50% interest in the underlying property. In some circumstances, however, it makes sense to pay the 3% real property transfer tax in order to avoid a 55% estate tax.

Having assets owned by trusts can substantially enhance tax planning benefits. An added benefit to using a trust is that your descendants will be provided with asset protection in the event of a divorce or lawsuit as long as the investment remains in trust. Furthermore, you, as the grantor of the trust can continue to pay the income tax on any trust income. The income tax that you pay for the trust is a tax free gift! The grantor trust can be used as a FAMILY BANK to make tax free gifts to your children if they need to buy a home or make a business investment.

We strongly encourage you to consider one of the few bright sides of the current economic environment and take advantage of it for estate planning purposes. It is generally believed that interest rates will soon begin to rise. Inflation may also increase valuations. The fact that Treasury Inflation-Protected Securities (TIPS) recently sold for a negative yield is evidence the market expects inflation to return soon.

If you have a commercial real estate investment, you should seriously consider implementing an estate plan to move these assets out of your estate now!

(ACTION MUST BE TAKEN BEFORE YEAR END)

Prepaying gift tax rather than waiting and paying estate tax can make sense for individuals with large estates. How so? The gift tax is computed on a tax-exclusive basis (as a percentage of the value of property transferred), while the estate tax is computed on a tax-inclusive basis (as a percentage of all property in a decedent’s estate, including the amount used to pay estate taxes). In addition, many states (including New York and New Jersey) do not have a gift tax while they maintain an onerous estate tax.

A compelling example: A New York resident wants to transfer $10,000,000 to his children. If the taxpayer gifted $10,000,000 to his children (or to a trust for their benefit which is not subject to GST tax² ) in 2010, the taxpayer would only incur a federal gift tax of $3,500,000. If the same New York resident waited to transfer $10,000,000 to his children at death, after 2010, the taxpayer would need to die with $22,000,000 in assets ($12,000,000 of which would go to the IRS and New York State in estate taxes). In other words, the taxpayer could either transfer $10,000,000 to his children now at a cost of $3,500,000 or at death at a cost of $12,000,000³. As you can see, the 2010 gift will result in an overall tax savings of approximately 70% (or $8,500,000 under these facts).

This is an unprecedented opportunity – but you must act before the end of 2010 to enjoy this benefit. Please contact us immediately to discuss your options. 

¹In addition, the estate tax and GST tax are expected to be reinstated with an exemption of only $1 million and $1.3 million, respectively.

²Although there is no GST tax in 2010, any taxable gift for the benefit of a grandchild would need to be made directly to such grandchild or to a custodian account for the grandchild’s benefit. The gift should not be made to a trust as it could be subject to GST tax when distributed.

³The donor must survive the gift by three years for the tax brackets to apply.

New Laws Create Enormous Estate Planning Opportunities For The Wealthy

1. 1. INDIVIDUALS WHO DIED IN 2010. Executors have the option of :
      1. A $5,000,000 federal estate tax exemption, with a 35% maximum estate tax rate on the assets in excess of $5,000,000 and a full step-up in basis on all assets in the estate as provided under prior law¹ or alternatively,
      2. Elect there be no federal estate tax, under the modified carry-over basis regime. Under the modified carry-over basis regime, the tax cost basis of assets that are inherited is the lesser of the decedent’s adjusted basis in the property or its fair market value on date of death, unless the Executor allocates some of the permissible $1,300,000 basis step-up to that property. (There is an additional $3,000,000 basis step-up for property passing to the surviving spouse).

         Under the Act, the $5,000,000 exemption is the default provision. Executors will need to ascertain which method is more beneficial. Note that for decedents dying after December 31, 2009 and before December 17, 2010, the estate tax return will be due no earlier than September 19, 2011.

         PLANNING SUGGESTION: Electing into the modified carry-over basis option regime is often advisable for estates significantly in excess of $5,000,000 where there will be a large estate tax at the second death. However, estate tax savings must be carefully weighed against potential capital gains taxes when those assets are ultimately sold.

   2. INDIVIDUALS WHO DIE IN 2011 OR 2012.

   There is now a generous $5,000,000 federal exemption with a 35% maximum estate tax rate on the excess. In addition, for 2011 and 2012 a surviving spouse can use the unused portion of the estate tax exemption of his or her deceased spouse. This is referred to as the “portability” provision. The deceased spouse’s executor must file an estate tax return (even if not otherwise required to do so) and make the appropriate election to carry forward the exemption. Some may think the portability provision makes a “credit shelter trust” obsolete. However, this is not necessarily the case. It depends on the State estate tax. If a “state credit shelter” trust is not created on the death of the first spouse, there may be unnecessary State estate tax payable on the death of the survivor. The use of a “credit shelter trust” will also preserve the generation-skipping transfer tax (“GST tax”) exemption of the first spouse to die, since the GST exemption is not portable.

PLANNING SUGGESTION: Meet with your estate planning attorney to determine whether your existing Will needs changing as a result of the new law and if a segregated State Credit Shelter Trust is appropriate.

1. 1. PLANNING FOR 2011 AND 2012.

   For 2011 and 2012 the gift tax exemption is reunified with the estate tax exemption at $5,000,000. This is a dramatic increase from the $1,000,000 exemption in 2010. The maximum gift tax rate remains at 35%.

PLANNING SUGGESTION: This is a great opportunity to make additional gifts if you have already used your $1,000,000 exemption. In addition, there is no New York or New Jersey gift tax, so a true tax-free transfer can be made. Since many states are suffering economically, there is a possibility that some states, including New York and/or New Jersey, may reinstitute their gift taxes. It therefore would be prudent (if you are inclined), to take advantage of the higher gift tax exemption sooner rather than wait and be subject to a potential gift tax as a result of a change in the law after 2012.

For wealthy clients who have estates significantly in excess of $10,000,000, using the $5,000,000 gift and GST exemptions now can create huge opportunities when selling assets such as commercial real estate or closely held business to an Intentionally Defective Grantor Trust (“IDGT”).

WARNING:

1. For individuals whose estates are less than $10,000,000 it is critical to review your Will provisions. Many Wills have been drafted to leave the exemption amount directly to children.

A provision such as this could result in the surviving spouse being disinherited.

1. Please review your plan to make sure your estate planning documents and asset structure match your objectives.
   1. GST EXEMPTION:

   For 2011 and 2012 the GST tax exemption has also increased to $5,000,000, with a maximum tax rate of 35%.

PLANNING SUGGESTION: Careful use of the $5,000,000 GST exemption in 2011 and 2012 can result in passing significant assets to the grandchildren and more remote generations without any federal transfer taxes.

1. NO CHANGES TO GRAT RULES OR VALUATION DISCOUNTS.

Significantly, the Act does not contain any provisions requiring a minimum term for grantor retained annuity trusts (“GRATs”). Therefore, short term GRATs continue to be a valuable estate planning tool. In addition, there are no provisions eliminating or curtailing valuation discounts for gift and estate tax purposes, so these continue to be an important component of estate plans.

SUMMARY:

The high gift and GST exemptions present significant estate planning opportunities, especially in the current economic environment where asset values and interest rates are very low. It should be noted that these changes apply only through December 31, 2012, and absent further legislation the law will revert to pre-2001 rates. Once again uncertainty reigns and it is recommended that you take advantage of these tremendous opportunities now.

• Credit Shelter Trusts continue to provide significant benefits.
• Clients with substantial wealth should consider using lifetime gifts to take advantage of the $5,000,000 gift tax exemption before it expires.
• For estates under $5,000,000, credit shelter trusts created under older Wills may unintentionally disinherit the surviving spouse.
• Implementing GRATs and sales to Intentionally Defective Grantor Trusts continue to be great planning techniques and can be enhanced under the new laws.

Please contact us at your earliest convenience to review the potential impact of the current legislation on your estate plan.

The information in this e-mail message may be privileged, confidential, and protected from disclosure. If you are not the intended recipient, any dissemination, distribution or copying is strictly prohibited. If you think that you have received this e-mail message in error, please e-mail the sender and delete all copies. Thank you.

As required by new U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this email, including attachments, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

Real estate is typically owned in a Limited Liability Company (LLC) or Limited Partnership (LP). To move your interest in the LLC or LP out of your estate, we usually recommend first having the membership or partnership interests appraised on a discounted basis to reflect discounts for lack of marketability and minority interest. The service of a reputable appraiser is necessary. Simultaneously, you will create an irrevocable grantor trust (sometimes referred to as a “defective grantor trust”) for the benefit of the family. The grantor trust is funded with seed capital (usually through $13,000 annual exclusion gifts or gifting a portion of the current $5,000,000 lifetime gift tax exemption). The seed capital must equal at least 10% of the sale price. Any value in excess of the gifted or seeded amount will be sold to the grantor trust in exchange for a promissory note. Using the combined $10,000,000 of available gift tax exemption for a husband and wife can allow for the movement of real estate interests via gift and sale up to $100,000,000. When discounts are also factored in, the undiscounted value of the properties transferred may be as high as $150,000,000. Once the trust has been funded with the seed capital via gift and the appraisal is complete, you will sell your ownership interest in the LLC or LP (or a portion thereof) to the grantor trust in exchange for a promissory note. Under current tax law, the sale to a grantor trust is not a taxable event for income tax purposes.

As stated, the LLC or LP interest is sold to the grantor trust in exchange for a promissory note. If the note is less than 9 years, the IRS stated Applicable Federal Rate for May 2011 is only 2.44%. The cash flow going into the trust (now as the owner of the LLC or LP interest) will be used to pay down the interest and principal on the note. Once it is paid off, future cash flow can remain in the trust and grow outside of your estate (instead of accumulating in your estate and eventually being subject to estate tax).

A tremendous benefit of a grantor trust is that transactions between you and your grantor trust are not taxable. Thus, a sale of an LLC or LP interest to your grantor trust is not a taxable event. However, if an interest representing 50% or more of the underlying property is sold within a 3 year period, there can be NYS/NYC real property transfer taxes of about 3%. This can be avoided by selling less than a 50% interest in the underlying property. In some circumstances, however, it makes sense to pay the 3% real property transfer tax in order to avoid the estate tax. It is important to note that the basis in the hands of the trust is a carryover basis. Because the sale is to a grantor trust, there is no increase in basis. This will result in capital gain taxes later if the property is ever sold. Therefore, if you consider doing a sale, you must weigh potential capital taxes against the estate tax savings. Special attention must be given to investments with a negative basis.

Having assets owned by trusts can substantially enhance tax planning benefits. An added benefit to using a trust is that your descendants will be provided with significant asset protection in the event of a divorce or lawsuit as long as the investment remains in trust. Furthermore, you, as the grantor of the trust can continue to pay the income tax on any trust income. The income tax that you pay under current law for the trust is a tax free gift! The grantor trust can also be used as a FAMILY BANK to make tax free gifts to your children if they need to buy a home or make a business investment.

We strongly encourage you to consider one of the few bright sides of the current economic environment and take advantage of it and the temporary $5 million gift tax exemption for estate planning purposes. It is generally believed that interest rates will soon begin to rise. Inflation may also increase valuations.

If you have a commercial real estate investment, you should seriously consider implementing an estate plan to move these assets out of your estate now!

The information in this e-mail message may be privileged, confidential, and protected from disclosure. If you are not the intended recipient, any dissemination, distribution or copying is strictly prohibited. If you think that you have received this e-mail message in error, please e-mail the sender and delete all copies. Thank you.

As required by new U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this email, including attachments, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

As you may be aware, the current lifetime gift tax exemption is $5 million. This lifetime exemption is the cumulative amount an individual can give away without the imposition of any gift tax and is in addition to the $13,000 annual gift tax exclusion. However, the lifetime gift tax exemption prior to 2011 was only $1 million. The IRS is looking for unreported gifts of real estate to raise significant gift tax revenue. If an individual made a transfer of real estate (evidenced by recording a new deed) for less than full and adequate consideration, that transfer should have been reported on a timely filed gift tax return. The return must reflect the fair market value of the gift as of the date of transfer (usually by attaching a certified appraisal). If the value was less than the $ 1 million exemption (taking into account prior taxable gifts), there will not be any tax, interest or penalty due. However, less exemption will be available going forward. If the value exceeds the $1 million exemption, the taxpayer will be exposed to potential gift tax liability, plus onerous penalties and interest.

If you have made such a transfer of real estate that was not reported on a gift tax return, it is important to disclose that gift now. Let us help you navigate the process.

Link to WSJ article

The information in this e-mail message may be privileged, confidential, and protected from disclosure. If you are not the intended recipient, any dissemination, distribution or copying is strictly prohibited. If you think that you have received this e-mail message in error, please e-mail the sender and delete all copies. Thank you.

As required by new U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this email, including attachments, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

New Laws Create Enormous Estate Planning Opportunities For The Wealthy

1. 1. PLANNING FOR 2011 AND 2012.

   For 2011 and 2012 the gift tax exemption is reunified with the estate tax exemption at $5 million. This is a dramatic increase from the $1,000,000 gift tax exemption in 2010. The maximum gift tax rate remains at 35%.

PLANNING SUGGESTION: This is a great opportunity to make additional gifts if you have already used your $1,000,000 exemption. In addition, there is no New York or New Jersey gift tax, so a true tax-free transfer can be made. Since many states are suffering economically, there is a possibility that some states, including New York and/or New Jersey, may reinstitute their gift taxes. It therefore would be prudent to take advantage of the higher gift tax exemption sooner rather than wait and be subject to a potential gift tax as a result of a change in the law after 2012.

For wealthy clients who have estates significantly in excess of $10,000,000, using the $5,000,000 gift and GST exemptions now can create huge opportunities when selling assets such as commercial real estate or closely held business to an Intentionally Defective Grantor Trust (“IDGT”).

WARNING:

1. For individuals whose estates are less than $10,000,000 it is critical to review Will provisions. Many Wills have been drafted to leave the exemption amount directly to children.

A provision such as this could result in the surviving spouse being disinherited.

1. Please review your plan to make sure your estate planning documents and asset structure match your objectives.
   1. INDIVIDUALS WHO DIE IN 2011 OR 2012.

   There is now a generous $5,000,000 federal exemption with a 35% maximum estate tax rate on the excess. In addition, for 2011 and 2012 a surviving spouse can use the unused portion of the estate tax exemption of his or her deceased spouse. This is referred to as the “portability” provision. The deceased spouse’s executor must file an estate tax return (even if not otherwise required to do so) and make the appropriate election to carry forward the exemption. Some may think the portability provision makes a “credit shelter trust” obsolete. However, this is not necessarily the case. It depends on the State estate tax. If a “state credit shelter” trust is not created on the death of the first spouse, there may be an unnecessary State estate tax payable on the death of the survivor. The use of a “credit shelter trust” will also preserve the generation-skipping transfer tax (“GST tax”) exemption of the first spouse to die, since the GST exemption is not portable.

PLANNING SUGGESTION: Meet with your estate planning attorney to determine whether your existing Will needs changing as a result of the new law and if a segregated State Credit Shelter Trust is appropriate.

1. 1. GST EXEMPTION:

   For 2011 and 2012 the GST tax exemption has also increased to $5,000,000, with a maximum tax rate of 35%.

PLANNING SUGGESTION: Careful use of the $5,000,000 GST exemption in 2011 and 2012 can result in passing significant assets to the grandchildren and more remote generations without any federal transfer taxes. Consider creating a trust in a jurisdiction such as Delaware that does not have a perpetuities statute (ie. trusts can go on forever).

1. NO CHANGES TO GRAT RULES OR VALUATION DISCOUNTS.

Significantly, the Act does not contain any provisions requiring a minimum term for grantor retained annuity trusts (“GRATs”). Therefore, short term GRATs continue to be a valuable estate planning tool. In addition, there are no provisions eliminating or curtailing valuation discounts for gift and estate tax purposes, so these continue to be an important component of estate plans. However, there are proposals that would require a GRAT have a minimum term of 10 years.

SUMMARY:

The high gift and GST exemptions present significant estate planning opportunities, especially in the current economic environment where asset values and interest rates are very low. It should be noted that these changes apply only through December 31, 2012, and absent further legislation the law will revert to pre-2001 rates. Once again uncertainty reigns and it is recommended that you take advantage of these tremendous opportunities now.

• Credit Shelter Trusts continue to provide significant benefits.
• Clients with substantial wealth should consider using lifetime gifts to take advantage of the $5,000,000 gift tax exemption before it expires ($10,000,000 for a married couple).
• For estates under $5,000,000, credit shelter trusts created under older Wills may unintentionally disinherit the surviving spouse.
• Implementing GRATs and sales to Intentionally Defective Grantor Trusts continue to be great planning techniques and can be enhanced under the new laws.
• Create Delaware Trusts to avoid transfer taxes in perpetuity.

Please contact us at your earliest convenience to review the potential impact of the current legislation on your estate plan.

The information in this e-mail message may be privileged, confidential, and protected from disclosure. If you are not the intended recipient, any dissemination, distribution or copying is strictly prohibited. If you think that you have received this e-mail message in error, please e-mail the sender and delete all copies. Thank you.

As required by new U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this email, including attachments, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.