2010 Tax Act—How it Affects
Estate and Gift Taxes
The Federal government enacted
a new tax act at the end of December 2010. This is an important
law in many ways. It extends the 2001 and 2003 income tax “cuts”
until the end of 2012. It also made some significant changes to
the estate and gift tax laws.
The very good news is that almost
all of the estate and gift tax changes are favorable. However,
these changes are only temporary and will expire at the end of
2012 unless Congress enacts other legislation. Because relying
on the Congress to do the “right” thing is risky, we think it
unwise for clients to plan for the long run based upon these temporary
law changes. Nonetheless, these changes suggest that all clients
review their estate plans. Also, the temporary changes provide
significant planning opportunities.
In 2001 the federal estate tax
exemption amount was $675,000, increasing over time so that by
2009 the exemption amount was $3,500,000. In 2010 there was no
federal estate tax. Absent action by Congress, the exemption amount
would have been $1,000,000 in 2011 and future years. The 2010
Act set the estate tax exemption at $5,000,000, but again only
for 2011 and 2012. Under the law as written, this exemption will
drop to $1,000,000 after 2012. These differences in exemption
amounts can have a significant impact on your estate plan. In
order to maximize the federal estate tax exemption and minimize
federal estate tax, many clients have used estate plans with a
“Trust B” configuration, or what is also sometimes referred to
as a “Credit Shelter Trust” or “Family Trust.” The trade off is
that the Trust B arrangement can reduce the amount of assets that
the surviving spouse receives outright. Given the changes to the
federal estate tax, it would be wise for clients to consider whether
the “Trust B” arrangement is still appropriate or should be eliminated
or modified.
The 2010 Act allows a surviving
spouse to inherit the unused estate tax exemption of the first
spouse to die – so-called “portability” of unused tax exemptions.
Some articles in the popular press have contended that this opportunity
simplifies estate tax for all but the most wealthy of Americans.
That simply is not true. The law that allows for the portability
of the exemption for use by the surviving spouse expires at the
end of 2012. So relying on it may not be warranted.
Further complicating matters is
the fact that although the federal estate tax is affecting fewer
people, Indiana still has an inheritance tax which operates separately
from the federal estate tax. Although under Indiana law a person
can leave an unlimited amount of assets to their spouse without
incurring Indiana inheritance tax, once the surviving spouse passes
away, there is only a $100,000 Indiana inheritance tax exemption
per child or other descendant. As a result of the changes to the
federal estate tax and the continued presence of the Indiana inheritance
tax, your estate planning documents should be reviewed to ensure
that they reflect your wishes no matter what the estate exemptions
are.
In addition to the estate tax
exemption amount, the 2010 Act made significant changes to the
gift tax exemption amount. Even though the estate tax exemption
amount increased over time to $3,500,000 by 2009, the amount of
money that a person could gift during their lifetime remained
at $1,000,000. The 2010 Act increased the gift tax exemption amount
to $5,000,000 as well, but again only for 2011 and 2012. We think
that it is appropriate for clients to consider using their increased
gift tax exemptions soon. Obviously, for many people, a lifetime
gift of $5,000,000 is much too large. However, a smaller gift
using a part of the larger exemption may be wise to consider.
Another significant development
relates to the estate, gift and Generation Skipping Transfer (GST)
tax rates. The top estate, gift and GST tax rates will be only
35% for this year and next year. Beginning after 2012, the rates
are scheduled to increase to 55% (and 60% for some). The effective
rate of estate and GST taxes also can result in significant changes
in what each of your family members receives. We think it is appropriate
for you to review your plans for the disposition of your property
whether the rates of tax are very high or not.
Finally, we oftentimes focus on
tax issues involving estate planning. Estate planning is more
than just about taxes. Among other things, it also involves making
sure that your loved ones are provided for, that any special needs
or circumstances of your loved ones are considered and that any
charitable intent that you have is carried out. As such, even
if the estate tax is not an issue for you, other circumstances
may have changed such that your estate planning documents should
be reviewed.
Our estate planning services
are designed for the orderly transfer of wealth, taking into consideration
each client's individual goals and circumstances. We stay current
on changing tax laws and techniques to best accomplish a client's
objectives. For assistance in Estate Planning matters, please
contact John Hegeman, Mark Samila, Allison Comstock or Alan Shovers
at 812.423.3183.
IRS Conducting “Full-Scope
Examination” of 401(k) Plans Not Submitting Questionnaire
A previous IRS study found 401(k)
plans to be "the most non-compliant plan type in the retirement
plan universe." In an attempt to better understand those
compliance issues, the IRS initiated a 401(k) Compliance Questionnaire
Project. As part of that Project, in May 2010, the Employee Plans
Compliance Unit (EPCU) of the IRS sent out letters and instructions
to a random selection of 1,200 employers currently sponsoring
401(k) plans for their employees. The letters instructed the 1,200
plan sponsors to complete a 46-page 401(k) Compliance Check Questionnaire
online by visiting a secure website. The IRS indicated the information
gathered from the Questionnaire responses would help provide a
comprehensive view of 401(k) plans, culminating in a published
report from the IRS. This report will identify areas where additional
education, guidance, and outreach are necessary; and also help
the IRS to maximize its resources with regard to enforcement efforts
addressing and/or avoiding non-compliance, while minimizing the
burden placed on compliant 401(k) plan sponsors. When mailing
the letters, the IRS stated that this compliance check was not
an audit or investigation but that failure to complete the Questionnaire
would result in further enforcement action.
Now, the IRS is making good on
that promise. Recently, Monika Templeman, Director, Employee Plan
Examinations has announced in the IRS online newsletter that all
plan sponsors who failed to return the 401(k) Compliance Check
Questionnaire will have their 401(k) plans subjected to a “full-scope
examination” in order for the IRS to obtain the data it needs
for the market segment analysis to be included in its published
report.
While responding plan sponsors
are not exempted from future IRS examination or compliance checks,
any notice of such examination will not be a “direct result” of
answers given on the Questionnaire. Also, other plan sponsors
who were not asked to participate are nevertheless encouraged
to use the Questionnaire as internal control tool to review their
plan and verify that it is in compliance. Remediation measures
should be taken as soon as possible to correct any mistakes in
non-compliant plans.
The IRS is scheduled to post an
interim report of general findings from the Questionnaire by the
end of September 2011, with the final report to be released sometime
in 2012.
Given the recent indication of intent of the IRS to step up compliance
reviews and enforcement with regard to 401(k) plans, we recommend
that you act quickly to confirm that your plan documents, summaries
and forms are in order and consistent with the plan, and that
plan administration is in accordance with the plan and all applicable
laws.
If you would like more detailed
information on how this 401(k) Compliance Project may affect your
company’s retirement plan, or if you would like a copy of the
401(k) Compliance Check Questionnaire please contact Mark Samila
or Steve Theising.
The articles
in The KDDK Advantage are considered legal information and should
not be taken as legal advice.
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