September 1, 2012

Current Estate Planning Opportunities

By Emma Q. Sobol

Learn about a variety of estate planning mines to avoid such as transfer taxes on fists and estates, as well as estate planning tools such as Grantor Trusts and exclusions that apply.

Overview of 2010 Tax Relief Act On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Act”). The 2010 Act provides individuals with unique estate planning opportunities available until the end of this year. Taking advantage of these opportunities could significantly reduce transfer taxes that otherwise might be payable.


Transfer Taxes

The 2010 Act substantially increased the exclusion and exemption amounts that an individual can transfer without incurring transfer taxes (estate tax, gift tax, and generation-skipping transfer tax), but only for transfers made in 2011 or 2012.

  • Estate Tax. Estate tax is imposed on transfers made at death that exceed the estate tax exclusion amount (reduced by lifetime gifts that used gift tax exclusion).

  • Gift Tax. Gift tax is imposed on taxable gifts made during lifetime (i.e., gifts that do not qualify for the annual exclusion from gift tax or for the tuition or medical exclusions) in excess of the gift tax exclusion amount.
  • GST Tax. Generation-skipping transfer (“GST”) tax is imposed on transfers made during lifetime or at death to persons more than one generation below the transferor’s generation (such as grandchildren) and is in addition to the gift tax and the estate tax. Each individual is entitled to an exemption from the GST tax.


Sunset in 2013

The provisions of the 2010 Act are scheduled to “sunset” (expire) on December 31, 2012. Therefore, in the absence of Congressional action, the harsher pre-2001 tax laws will be reinstated in 2013 as indicated in the Summary chart on page 5.


Summary Chart

The exclusion and exemption amounts and tax rates for 2009 through 2013 are set forth in the Summary Chart. Note: The amounts are indexed for inflation beginning in 2012.


Current Estate Planning Opportunities

The 2010 Act creates significant wealth transfer planning opportunities for the remainder of 2012. The increase in the lifetime gift tax exclusion to $5 million means that, in addition to any unused sell compared with a 100 percent interest. The order of magnitude of the combined discounts for lack of control and lack of marketability may yield a reduction from a pro rata portion of the underlying value of perhaps 20 percent or more for undivided interests in real properties and perhaps 30 percent or more for minority business interests. Such a discount means, in effect, that in valuing a transfer of an undivided interest in real property or a minority business interest, perhaps 20 percent or 30 percent of the “real” value of the interest is made to “disappear.” Therefore, making gifts of discountable assets “leverage” the transfers (i.e., transfer greater value than the value for gift tax purposes). Because of this leverage, direct gifts of such assets can be a good use of the increased gift tax exclusion. Furthermore, there has been much discussion in recent years that Congress may eliminate or restrict intra-family discounts. Therefore, wealthy individuals should consider taking advantage of the planning opportunities afforded by discountable assets while they are still available.


Enhancing the Economic Benefits with a Grantor Trust The gift planning described above can be further enhanced if the gifts are made to a “grantor trust” (sometimes also referred to as an “intentionally defective grantor trust” or “IDGT”) for the donee, rather than directly to the donee. A grantor trust is a trust that is respected as a separate legal entity for gift and estate tax purposes but ignored for income tax purposes. As a result, assets that are gifted to a grantor trust are not treated as part of the donor’s taxable estate, but the donor continues to pay the income taxes generated by the gifted assets. The donor’s paying the income taxes yields an enormous estate planning benefit over time because the donor is essentially making additional gifts to the beneficiaries of the trust at no transfer tax cost. Importantly, the Obama administration recently released a 2013 budget proposal that, if enacted into law, would eliminate the current favorable treatment of grantor trusts.


Combining Gifts with Sales to the Grantor Trust Once a grantor trust is funded with gifted assets and has real economic substance for gift and estate tax purposes, then the trust could purchase additional assets (perhaps, discountable assets) from the donor (the “grantor”) for a promissory note. The estate planning effect of such a sale transaction would be to “freeze” the value of the assets sold to the grantor trust at their current (possibly discounted) value represented by the promissory note and, as with the gift transfers noted above, to cause future income (pre-tax) and increase in value in the assets to escape taxation in the grantor’s estate. Because the purchaser of the assets is a “grantor trust” for income tax purposes, no gain would be realized by the grantor upon the sale of appreciated assets to the trust, and interest payments made by the trust on the promissory note payable to the grantor would not generate taxable income to the grantor. In addition, as noted above, trust income that derives from ownership of the purchased assets would be taxable to the grantor and not to the trust even though the income would be paid to the trust, which effectively enables the grantor to make “tax-free” gifts to the trust beneficiaries by paying the income tax liability that the trust or they would otherwise pay. This is a particularly opportune time to sell assets to a grantor trust because of the current depressed asset values, the historically low interest rate environment, and the possibility that the favorable treatment of grantor trusts will be eliminated in the near future.


Taking Advantage of the Increased GST Exemption The increased GST exemption means that, by allocating GST exemption to assets that are gifted in trust in 2012, the assets can pass through the generations with no estate tax, gift tax, or GST tax. The GST exemption can be further leveraged in the case of sales to a grantor trust because GST exemption need be allocated only to the gift fund without transfer tax while remaining available to the trust beneficiaries. Therefore, proper GST planning can result in enormous tax savings over the years, especially if the trust principal remains largely intact.


Use It or Lose It

Making lifetime gifts that utilize the $5 million lifetime gift tax exclusion and allocating GST exemption to gifts in trust may be the only way to ensure that the increased exclusion and exemption amounts are fully utilized because both amounts are scheduled to decrease to $1 million after 2012. Therefore, these may be “use it or lose it” estate planning opportunities. 

Summary of 2010 Act


Gift Tax Exclusion;

Maximum Tax Rate

Estate Tax Exclusion;

Maximum Tax Rate

GST Tax Exemption;

Maximum  Tax Rate


$1 million exclusion 45% tax rate

$3.5 million exclusion 45% tax rate

$3.5 million exclusion 45% tax rate


$1 million exclusion 35% tax rate

$5 million exclusion 35% tax rate

(unless the “no estate tax regime” is elected)

$5 million exclusion 35% tax rate

2011 –


$5 million exclusion 35% tax rate

$5 million exclusion 35% tax rate

$5 million exclusion 35% tax rate


$1 million exclusion 55% tax rate

$1 million exclusion 55% tax rate

$1 million exclusion 55% tax rate

Emma Q. Sobol (, counsel in the San Francisco office of Hanson Bridgett, specializes in trusts and estates.