The long-awaited Tax Relief Act of 2010 is providing an unprecedented opportunity through the end of 2012 for everyone—not just the ultra-wealthy—to benefit from short-term tax breaks impacting gifting and estate planning. The Tax Act, which was signed by President Obama in December 2010, provided a number of short-term opportunities, the most substantial being an increase of the gift tax, estate tax and generation-skipping (GST) tax exemptions, which have been raised to $5 million.
Those who act now by establishing new trusts, giving substantial gifts or revisiting life insurance policies will be able to transfer considerable wealth without being significantly taxed.
Since the exemption is only valid until 2013, acting quickly and efficiently is necessary to completely take advantage of the Tax Act. It’s imperative for individuals to examine new retirement planning, wealth management and transfer opportunities that have been made available.
What Changes Did the Tax Act Really Make?
Before the Tax Act, the maximum federal tax rate had been reduced by Congress gradually since 2001. In 2010, the lifetime gift tax exclusion was $1 million, and there was no estate tax or generation skipping transfer tax. When the Act passed, the tax rate was significantly lowered to 35%, and the lifetime gift tax exclusion amount was boosted up to $5 million, providing opportunity to transfer large assets tax free. As mentioned before, the bill is only temporary, and on Dec. 31, 2012, it’s expected to return to a maximum 55% tax rate with a $1 million exclusion—unless Congress takes action.
Although this Act offers the chance to transfer wealth tax free, it is no time to be careless when it comes to compliance. People who use this window of opportunity to make substantial transfers and plans for retirement should file appropriate tax returns and seek counsel from a knowledgeable advisor.
Strategies for Reaping Maximum Benefits from the Tax Relief Act
Time is of the essence when it comes to the Tax Relief Act. There are a number of ways individuals can take full advantage of the Act to transfer wealth, prepare for the future and offer security for their descendants. The following are seven prospects worth exploring before time runs out.
Take Time to Revisit Existing Life Insurance. All life insurance plans should be fully reviewed whenever new tax legislation is passed to prepare for future changes. With the current Act, establishing an irrevocable life insurance trust (ILIT) is an excellent way to leverage the short-lived reunification, because it solidifies how much an heir will receive and doesn’t have to be revisited when Congress passes a new bill. This may be a good opportunity to gift an existing personally owned policy into an ILIT or gift enough funds to an ILIT to purchase additional insurance. If existing insurance is owned under a split dollar agreement, the higher gifting limits may facilitate the termination of that agreement.