Why is this Topic Important to Wealth Managers? This blogticle represents part one of a five in a series on the estate and gift tax and portability of the spousal credit. Most wealth managers are cognizant of the new changes to the federal estate and gift tax structure with an increased exemption amount of five million dollars. This week we discuss the current estate and gift tax in detail so that wealth managers are well prepared to address client planning needs.
As most wealth managers are aware, extension of the Bush tax cuts created a number of changes related to the gift and estate tax. For a better understanding of the new federal gift and estate tax provisions, and how they relate to clients’ estate plans, the prior law will first be discussed.
In general, a gift tax is imposed on certain lifetime transfers and an estate tax is imposed on certain transfers at death; the federal gift and estate tax are taxes on the right to transfer property; not a tax on the underlying property itself. In 2001, the federal estate tax exemption was $675,000 with a top estate tax rate of 55%. When the Bush administration passed its tax cut legislation, the federal estate tax exemption underwent a series of increases. By 2009, the exemption escalated to $3.5 million with a top tax rate of 45%. The federal estate tax exemption was repealed in 2010, and the Bush’s tax cuts sunset provisions were set to expire in 2011, which meant that the federal estate tax would have been $1 million with a top rate of 55%.
Nevertheless, President Obama’s tax compromise – the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (Tax Relief Act of 2010 or TRA of 2010) – which came into effect on December 17, 2010, changed the direction of expiring provisions.  The Tax Relief Act of 2010 contains new sunset provisions which extend certain tax cuts and provides for gift and estate tax amendments.
Moreover, the Tax Relief Act of 2010 created a number of favorable conditions that may be beneficial to your clients—but in order to fully take advantage of these changes it will help to review the Tax Relief Act of 2010 and how it directly relates to client planning.
As presented in the AMAFX Advisors Journal, whether or not to give substantial lifetime gifts in 2011 and 2012 is going to be a hot topic between now and the end of 2012. But deciding whether to take advantage of the record high ($5 million) gift, estate and GST tax exclusion amount and low (35%) transfer tax rate isn’t a trivial matter.
Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For in-depth analysis of the federal estate tax, the federal gift tax, and the GST tax, see AMAFX Advisor’s Main Library: A – Federal Estate Tax General, A – Nature and Background Of The Federal Gift Tax, and A – Generation Skipping Transfers Explained.
Tomorrow’s blogticle will continue our weeklong series on the gift and estate tax.
We invite your questions and comments by posting them below, or by calling the Panel of Experts.
 AMAFX-AUS Main Library. The Federal Estate Tax. http://www.advisorfx.com/articles/f2_1_12_1090.aspx?action=13 (last accessed April 6, 2011).
 Darien B. Jacobson, Brian G. Raub, and Barry W. Johnson, The Estate Tax: Ninety Years and Counting, 122. Available at: http://www.irs.gov/pub/irs-soi/ninetyestate.pdf (last accessed April 8, 2011).
 Jacobson, Raub, and Johnson, supra note 2, at 124.
 Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010, P.L. 111-312; U.S. Congress. House of Representatives. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, 24 (H.R. 4853). Available at: http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853enr/pdf/BILLS-111hr4853enr.pdf (last accessed April 6, 2011).