Vol. 84, No. 3, March 2011
Dramatic developments concerning the federal estate, gift, and generation-skipping taxes occurred in December 2010. This article describes those federal changes and the current state of Wisconsin’s estate and gift taxes. Of necessity, this is a preliminary and general description of the federal changes. Many new issues will arise as practitioners and the Internal Revenue Service (IRS) begin working with the new federal laws. As of early February 2011, the IRS has not issued any forms, instructions, regulations, or other guidance. Therefore, planning for the new laws is very difficult, and complying with the new laws is impossible because the forms for compliance are not available.
On June 7, 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) into law.1
EGTRRA made many significant changes to federal estate tax law, including deunification of the gift and estate taxes, gradual increases in the federal estate tax and generation-skipping tax (GST tax) exemptions from $675,000 to $3.5 million from 2001 to 2009, repeal of the federal estate and GST taxes (not the gift tax) in 2010, and elimination of the federal state death tax credit. One of the most significant provisions of EGTRRA was the controversial sunset clause providing that beginning on Jan. 1, 2011, the Internal Revenue Code of 1986 shall be applied as if EGTRRA had never been enacted.2
Under the sunset clause, the changes made by EGTRRA would expire at the end of 2010 and federal estate, gift, and GST taxes would revert to the federal law as it existed on Dec. 31, 2001. This meant that in 2011, the federal estate tax exemptions would revert to $1 million3 and the GST tax exemption would revert to $1.34 million.4 EGTRRA created a gap in the law for 2010 and a cliff between 2001 and 2011 that Congress would have to scale sometime between 2001 and 2009 to avoid the effect of the sunset clause. Most commentators expected Congress would avoid the instability created by EGTRRA with respect to 2009, 2010, and 2011 by enacting a replacement law sometime between 2001 and 2009. However, scaling the cliff proved to be very arduous. At the end, Congress did not act. 2010 arrived, and the federal estate and GST tax laws were repealed. The gift tax remained in effect.
Gridlock continued in 2010. Finally, on Friday evening, Dec. 10, 2010, President Barack Obama held a dramatic press conference and announced he was taking control of the situation. He negotiated a deal with Republican congressional leaders, and a bill was prepared. Congress enacted the bill and the President signed it into law on Dec. 17, 2010, as the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (the Tax Relief Act of 2010 or TRA 2010).5
The TRA 2010 extended EGTRRA for another two years. The controversial sunset clause remains. EGTRRA now sunsets at the end of 2012. So, the uncertainty continues. The estate, gift, and GST tax laws will now play roles in the 2012 presidential and congression-al election campaigns. Also, the TRA 2010 amended the estate, gift, and GST tax provisions of EGTRRA. This article discusses the amendments made to EGTRRA at the end of 2010 and the uncertainty created by the extension of the sunset clause for another two years.
In 2001, Congress destabilized the death-tax systems of all 50 states and the District of Columbia by eliminating the “pick-up tax,” which all the states and the District of Columbia had adopted.6 Wisconsin’s pick-up tax is discussed below. With its inaction and action in 2009 and 2010, Congress has now made the federal estate tax system unstable.
Federal Estate Tax
Surprisingly, the estate tax provisions of the TRA 2010 are retroactive and apply to the estates of all people who died in 2010. Lawyers should review 2010 estates, whether open or closed, and determine whether the provisions of the TRA 2010 affect the estate. Some estates may be closed and may have to be reopened if the retroactive estate tax affects the estate.
The federal estate tax exemption7 was set at $5 million for 2010, 2011, and 2012. It is indexed for inflation beginning in 2012 with 2010 as the base. The estate tax rate is a flat 35 percent for 2010, 2011, and 2012.
The gift tax and GST tax exemptions are also $5 million and are discussed below.
To avoid litigation between 2010 estates and the government over retroactivity, the TRA 2010 allows a 2010 estate to elect out of the federal estate tax for 2010 and elect into
The estates of people who died during the first 50 weeks of 2010 were not then subject to the federal estate tax. This led to issues in some 2010 estates in which a disposition of assets was based on a formula relating to the federal estate tax exemption. For example, the decedent’s will or trust might provide, “I leave the largest federal estate tax exemption amount allowed by Congress to a credit shelter trust and I leave my spouse the rest of my estate.” Until Dec. 17, 2010, there was no federal estate tax exemption amount and such a formula bequest was difficult to construe.
To deal with the construction issues presented by some formula clauses, the Wisconsin Legislature enacted 2009 Wisconsin Act 341, which created Wis. Stat. section 854.30. Section 854.30 provides that the estates of 2010 decedents shall be administered on the assumption that the decedent died in 2009 when the federal estate tax exemption was $3.5 million. Section 854.30(4) provides that section 854.30 shall not apply if the federal estate tax is applicable to 2010 estates as a result of the “establishment or reinstatement of the federal estate tax.” Therefore, section 854.30 does not apply to 2010 estates that are subject to the federal estate tax. However, section 301(c) of the TRA 2010 allows 2010 estates to elect out of the estate tax and into carryover basis. If that election is made, the federal estate tax does not apply to the estate. If a 2010 Wisconsin estate elects into carryover basis, there may be an issue whether section 854.30 applies. The estate is not subject to the federal estate tax because of the election, but was there an “establishment or reinstatement” of the federal estate tax for purposes of construing the decedent’s will or trust?
The IRS did not create a federal estate tax return for 2010 estates because there was no tax for the first 50 weeks of the year. Now, with the estate tax being retroactive for all of 2010, Congress will have to create an estate tax return for estates of people who died in 2010. Because of this, the TRA 2010 extends the due date for filing estate tax returns for decedents who died before Dec. 17, 2010. Due- date extensions are discussed below.
Michael W. Wilcox, Marquette 1966, is a shareholder in DeWitt Ross & Stevens, Madison. He is a past chair of the State Bar Taxation Section, coauthor of the State Bar’s three-volume treatise, Marital Property Law in Wisconsin, a fellow in the American College of Trust and Estate Counsel, and listed in Best Lawyers in America.
Portability of Estate Tax
The TRA 2010 adds a new provision to the federal estate and gift tax – portability. The executor8 of a decedent who dies in 2011 or 2012 may elect to transfer (“port”) any unused estate tax exemption from the deceased spouse’s estate to the surviving spouse.9 Portability applies only to estates of decedents who die in 2011 or 2012. It does not apply to 2010 estates. Therefore, if the first spouse to die dies in 2011 and the surviving spouse dies in 2012, the surviving spouse can have an exemption of up to $10 million. To do this, the executor of the first estate must file a federal estate tax return (whether the estate is over or under the exemption) and elect portability. However, if the first spouse dies in 2011 and the surviving spouse dies in 2013, there will be no portability of the estate tax exemption unless Congress extends portability to 2013 estates. However, there is portability of the gift tax exemption for 2011 and 2012, as discussed below.
There are several practical issues regarding portability. For example, the estate tax exemption can be transferred only from the “last deceased spouse.” If there is a remarriage, portability may be lost.
Jane’s husband (Husband 1) dies in 2011. Husband 1’s estate does not use any of his exemption. Jane’s estate tax exemption is increased to $10 million. Jane remarries, and Husband 2 dies in 2012. Husband 2 uses his entire exemption on bequests of $5 million to his children from a previous marriage. Husband 2 has no exemption amount left. Husband 2 is Jane’s last deceased spouse. Jane loses the $5 million estate tax exemption she obtained from Husband 1. Her exemption drops from $10 million to $5 million. (The result is different with the gift tax exemption. See the gift tax discussion below.)
Portability will now be an issue with prenuptial and postnuptial agreements. The person with fewer assets will probably make portability an item to be negotiated or discussed. Portability will probably affect decisions to marry or not marry and to divorce or not divorce.
Portability will not be a major estate planning tool in 2011 and 2012. It will be elected if a spouse dies in 2011 or 2012, but it cannot be counted on as a planning technique because it may not exist in 2013. The planning opportunities are limited to situations in which it is expected one spouse will die in 2011 or 2012 and the other spouse will die in 2011 or 2012 or will want to make large gifts in 2011 or 2012 after the first spouse has died. Executors of decedents who die in 2011 or 2012 will probably elect portability in case the surviving spouse dies in 2011 or 2012 or wants to make large gifts in 2011 or 2012 or in case Congress extends portability beyond 2012.
Modified Carryover Basis
Section 301(c) of the TRA 2010 provides that 2010 estates may elect out of the estate tax and into EGTRRA’s modified carryover basis. EGTRRA’s carryover basis is “modified” because all estates can allocate $1.3 million of free basis to the decedent’s provable existing basis and $3 million of free spousal basis to the decedent’s provable basis of certain assets passing to or for the surviving spouse. New I.R.C. § 1022, which governs the new modified carryover-basis law, is much different and narrower than I.R.C. § 1014, which applies to estates subject to the federal estate tax. Under section 1014, generally, assets included in the gross estate receive a basis step-up.10 That is not true with section 1022. For example, if a 2010 decedent leaves his spouse a marital trust with a general power of appointment, that trust does not qualify for the spousal basis increase, but a trust meeting the requirements of a QTIP trust does qualify.
Steps can be taken after a decedent’s death to qualify for the spousal basis increase. For example, if a decedent leaves his spouse a marital trust with a general power of appointment, the surviving spouse can disclaim the general power and convert the trust into one meeting the QTIP requirements, thereby qualifying for the spousal basis increase.
The basis increases are added to the decedent’s provable basis. The executor reports and establishes the decedent’s basis with Form 8939, a new form that the IRS is developing.
Both halves of marital property are entitled to the $3 million spousal basis increase.
Example 1: John dies unmarried in 2010 with an estate of $8 million. John’s executor is confident he can report John’s basis in the $8 million estate as $4 million on Form 8939. John’s executor can allocate $1.3 million of additional basis to the assets to be reported on Form 8939, thereby increasing the aggregate basis to $5.3 million. John’s executor can elect to file a Form 706 and pay 35 percent estate tax on $3 million with a full step up in basis or elect to file Form 8939, pay no estate tax, and have unrecognized capital gain of $2.7 million subject to capital gain taxes when the assets are sold.
Example 2: John and Mary are husband and wife. All assets are marital property with a total value of $8 million. Their basis in the $8 million of assets can be reported on Form 8939 as $4 million spread equally among the assets. John dies in 2010. His one-half interest in their marital property has a value of $4 million. John leaves his $4 million estate to a credit shelter trust. John’s executor can allocate $1.3 million of additional basis to the assets in the credit shelter trust, increasing the basis in those assets to $3.3 million. John’s executor can allocate all of the $3 million spousal basis increase to Mary’s one-half marital property interest. Or, a portion of the $3 million spousal increase can be allocated to the credit shelter trust if it meets the requirements of a QTIP trust. A QTIP election is not necessary for a trust to meet the requirements of a QTIP trust. It might be possible to use a disclaimer to reform the credit shelter trust to a trust meeting the requirements of a QTIP trust. Or, it might be possible to convert the credit shelter trust to a unitrust to meet the requirements of a QTIP trust.11
Even though EGTRRA’s carryover-basis provisions for 2010 have been law for 10 years, the IRS has issued no forms, instructions, regulations, or other guidance with respect to administering carryover basis. Presumably, the IRS did not want to make that effort because of the uncertainty whether carryover basis would be the law in 2010. Now that carryover basis is the law for 2010, the IRS will have to issue forms, instructions, regulations, and guidance.
The IRS has announced that Form 8939 will be used to report, establish, and allocate the basis for assets. However, as of early February 2011, the IRS had not released the official version of Form 8939. The due date for filing Form 8939 is April 15, 2011, but indications are that the IRS will extend the due date beyond April 15.12
Estates under $5 million probably will elect to be governed by the federal estate tax, and estates over $5 million probably will elect to be governed by carryover basis. However, some estates will have to make calculations under both regimes to see which tax regime is better. Paying estate tax may be better in some cases than making the carryover-basis calculations and being subject to the capital gain tax. Likewise, there may be cases in which the estate is below $5 million, but electing capital gain tax treatment will be better than being governed by the federal estate tax law.
Elizabeth dies unmarried in 2010 with an estate valued at $6 million. Her estate consists entirely of a closely held business. The business must be appraised for purposes of the federal estate tax and modified carryover basis (if elected). For various reasons, Elizabeth’s executor may decide to pay the estate tax and obtain a full step up in basis on her interest in the business rather than elect into carryover basis.
Federal Gift Tax
The TRA 2010 made no changes in the federal gift tax for 2010. The exemption remains at $1 million and the gift tax rate remains a flat 35 percent.
However, the TRA 2010 reunified the gift and estate taxes for 2011 and 2012 and set the gift tax exemption at $5 million for 2011 and 2012, the same as the estate tax exemption. Also, portability applies to the gift tax. The exemption is indexed for inflation with 2010 as the base. The tax rate for 2011 and 2012 is 35 percent, the same as the 2010 rate.
The $13,000 annual gift tax exclusion remains in effect.
The $5 million gift tax exemption presents major opportunities for wealthy persons. Many wealthy families will consider it a “use it or lose it” proposition. They will use the $5 million gift tax exemption for fear the exemption may be decreased in 2013.
John and Mary have combined assets of $8 million. They determine they can live on $3 million of assets and decide to give $5 million to their children in 2011.
A decrease in the estate tax or gift tax exemptions in 2013 will present issues of tax apportionment and collectability if the estate tax exemption at death is smaller than the exemption used during lifetime. Lifetime adjusted taxable gifts are added back to the estate tax base and become subject to the estate tax. For example, if a donor makes a $5 million gift in 2012 and dies in 2013 when the estate tax exemption is $1 million, there will be estate tax on $4 million. If the estate is solvent and can pay the tax, issues may arise as to who bears the burden of the tax. If the estate tax on the $4 million makes the estate insolvent, there may be issues of collectability from the donees with the IRS. The author has not been able to find any time when the estate or gift tax exemption amount has been decreased. But a decrease in 2013 is certainly possible.13
The new gift tax exemption presents new opportunities for those persons who used their previous $1 million gift tax exemption. They now have an additional $4 million exemption with which to make gifts.
Portability of Gift Tax
The federal gift tax exemption, like the federal estate tax exemption, is portable. However, unlike estate tax portability, the gift tax exemption is not limited to the last deceased spouse.
Jane is married to Husband 1, who dies in 2011 with $5 million of unused estate tax exemption. Jane now has $10 million of exemption, which she can use for gift tax purposes or estate tax purposes. Jane can make gifts of $10 million in 2011 using her exemption and Husband 1’s exemption. Jane marries Husband 2. Husband 2 dies and uses his $5 million of exemption on bequests to his children by a prior marriage. Even though Jane has lost the $5 million of exemption transferred to her from Husband 1, Jane’s use of Husband 1’s $5 million of exemption for gift tax purposes stands. However, Husband 1’s $5 million exemption cannot be used in Jane’s estate on her death and will be subject to estate tax in Jane’s estate.
Federal Generation-Skipping Tax
The federal GST tax applies when there is a transfer that skips a younger generation.14 For example, if a grandparent makes a gift to a grandchild, the child (the grandchild’s parent) is skipped. The transfer to the grandchild is subject to the federal GST tax to make up for the estate tax that was lost because there was no transfer from the grandparent to the child and then to the grandchild.
The TRA 2010 amended EGTRRA to provide that the federal GST tax applies retroactively for all of 2010. The federal exemption is set at $5 million, but the GST tax rate is zero for 2010. The GST tax rate is a flat 35 percent for 2011 and 2012.
Congress made the GST tax retroactive for 2010 to avoid a gap in the law. Many GST tax provisions are cumulative and are based on prior actions. Applying the sunset clause to the GST tax meant that the provisions of the GST tax that existed between 2001 and 2010 would have been treated as never having been enacted. The effect of actions taken between 2001 and 2010 would have been uncertain.
Wis. Stat. section 854.30 applies to the GST tax as well as the estate tax. However, the TRA 2010 does not permit electing out of the GST tax, and so it appears that section 854.30 applies to formula clauses based on the GST tax exemption because there was “establishment or reinstatement” of the GST tax in 2010.
Mary dies in 2010. Her will states, “I leave the largest generation-skipping tax exemption amount allowed by Congress to my granddaughter and I leave the balance of my estate to my children.” For the first five months of 2010, the amount left to the granddaughter was
uncertain. However, as a result of the TRA 2010 and Wis. Stat. section 854.30, the granddaughter may now receive $5 million. This may be much more than Mary, her children, or her granddaughter imagined or expected.
The higher GST tax exemption presents new opportunities for those persons who used their previous $3.5 million GST tax exemption. They now have an additional $1.5 million with which to make generation-skipping transfers.
Since the GST tax rate was 0.0 percent in 2010, it was and is advantageous to make generation-skipping transfers in 2010. It is still possible to have transfers in 2010 be treated as generation-skipping transfers in 2010 through the use of disclaimers. A disclaimer made in 2011 is considered to have taken effect at the moment the transfer happened in 2010. It is expected that beneficiaries will make disclaimers of transfers that occurred in 2010 to take advantage of the 0.0 percent GST tax rate.
Portability of Generation-Skipping Tax
The generation-skipping tax exemption is not portable.
Certain Due Dates Extended
Because the TRA 2010 was enacted on Dec. 17, 2010, and has retroactive provisions, Congress extended the time to file certain tax returns and take certain actions.
The time to file a federal estate tax return for the estate of a decedent who died before Dec. 17, 2010, is extended to nine months after the date of enactment, which is Sept. 17, 2011.15 However, because Sept. 17 falls on a Saturday, the time is further extended to Monday, Sept. 19, 2011. The time to file a federal gift tax return also is extended to Sept. 19, 2011. GST tax returns reporting transfers are extended to Sept. 19, 2011, but the time for making allocations of GST tax exemption was not extended. However, the time to allocate GST tax exemption can be extended from April 15, 2011 to Oct. 17, 2011, under existing law, so the lack of an extension is not significant.
The time to file Form 8839 was not extended, but indications are the IRS will extend the form’s due date.
The time for making a qualified disclaimer under I.R.C. § 2518 is extended to Sept. 19, 2011, for transfers by reason of deaths that occurred before Dec. 17, 2010.16 However, the time to disclaim gifts made in 2010 was not extended. Generally, the time for making a qualified disclaimer under federal law is nine months from the date of the transfer. Wisconsin law provides that a disclaimer must be made within nine months to be valid, but Wis. Stat. section 854.13(12)(b) provides that a disclaimer meeting the requirements of I.R.C. § 2518 or the requirements of any other federal law relating to disclaimers is an effective disclaimer under Wis. Stat. section 854.13 or 700.27. Therefore, the federal extension automatically extends the Wisconsin time limit for a valid disclaimer.
Under I.R.C. § 2518, other requirements besides the time limit must be met to have a valid disclaimer. For example, a disclaimer is not valid if the recipient has accepted the benefits before disclaiming. Thus, if the beneficiary has accepted the 2010 bequest, a disclaimer after acceptance would not be qualified under I.R.C. § 2518.
I.R.C. § 2518 provides that a transfer that is not a valid disclaimer under state law may nevertheless be treated as a qualified disclaimer under federal law if certain federal requirements are met.
Example: Harry died in February 2010 in a state other than Wisconsin and left a bequest to his daughter, who now wishes to disclaim the bequest so it may go to her daughter. Harry’s executor held the estate open to see whether Congress amended EGTRRA. The applicable state law imposes a nine-month limit on disclaimers. Harry’s estate can transfer the bequest to the granddaughter and have the bequest treated as a qualified disclaimer under I.R.C. § 2518 even though the disclaimer is not a valid disclaimer under state law, assuming the federal law requirements are satisfied.
Wisconsin Estate TaxWhen EGTRRA was enacted in June 2001, all 50 states and the District of Columbia had pick-up estate tax systems under which the state picked up the amount of the state death tax credit allowed by Congress. For example, Wisconsin picked up the state death tax credit computed on the federal estate tax return.17 It was said that Wisconsin was “coupled” to the federal state death tax credit.
EGTRRA phased out the federal estate death tax credit in 2003 and 2004 and eliminated it beginning in 2005. EGTRRA had the effect of suddenly destabilizing the death tax systems of all 50 states and the District of Columbia. The Wisconsin Legislature decided to maintain the revenues from the pick-up tax. Effective Oct. 1, 2002, Wisconsin “decoupled” from the federal estate death tax credit and based the pick-up tax on the credit in effect in 2000.18 Wisconsin decoupled for five years and “recoupled” to the federal state death tax credit beginning in 2008.19 Presumably, Wisconsin decoupled for five years because legislators hoped Congress would restore the federal state death tax credit before the five years expired. Because EGTRRA remained in effect from 2008 to 2010, Wisconsin recoupled to a credit that did not exist. As a result, Wisconsin had no estate tax in 2008, 2009, or 2010.
The TRA 2010 extends EGTRRA for another two years, to the end of 2012. Therefore, Wisconsin remains recoupled to a credit that does not exist, and Wisconsin has no estate tax. Because Congress has extended EGTRRA’s sunset date to the end of 2012, the federal state death tax credit is scheduled to return in 2013. Wisconsin will resume picking up the federal credit in 2013 unless Congress amends the law in the meantime.
To summarize, at this time, Wisconsin is a recoupled state. Because Wisconsin is coupled to a credit that does not exist, Wisconsin has no estate tax for 2011 and 2012.
Wisconsin is one of 28 states that has no state death tax. Twenty-two states have a state death tax of some type.20
Wisconsin Gift Tax
Wisconsin has no gift tax. The gift tax was repealed for years beginning in 1992.
Wisconsin Generation-Skipping Tax
Wisconsin has never had a generation-skipping tax.
The table on page 13 summarizes some of the provisions of EGTRRA as amended by the TRA 2010.
When the 107th Congress enacted EGTRRA in 2001, it created the controversial sunset clause. Congress did not deal with the sunset clause. President Obama stepped in and resolved the situation. The 111th Congress in 2010 extended the sunset clause for another two years. Congress still has to deal with the sunset clause. If Congress once again does not act, the federal estate, gift, and GST tax laws will revert in 2013 to the provisions in effect in 2001. The estate and gift tax exemptions will decrease from $5 million ($10 million with portability) per person in 2012 to $1 million per person in 2013.
Predictions for 2013
It is impossible to predict what Congress will do with respect to EGTRRA and the two-year sunset clause. However, clients like to have some sense of what to expect. The author’s predictions of what Congress may do for 2013 are shown in the sidebar below.
Wisconsin has had no gift tax since 1991 and no estate tax since 2007. There are no bills pending in the Wisconsin Legislature at this time to enact a gift, inheritance, or estate tax.
Estate Planning for 2013
Estate planning for 2013 is difficult as a result of the uncertainty concerning the estate tax exemption. The exemption may decrease from $5 million ($10 million when there is portability) in 2012 to $1 million in 2013. Flexibility will be important. Disclaimer plans and trusts that can be QTIPed in whole or in part are two approaches to flexibility. With a disclaimer plan, the first spouse to die leaves all assets to the surviving spouse with the surviving spouse being able to disclaim to a credit shelter trust.21 If a credit shelter trust is desired on the death of the first spouse to die, the surviving spouse can disclaim assets, which then fund the credit shelter trust.
Another technique is to use a QTIP-able trust. Under this plan, the first spouse to die creates a trust with the first spouse’s executor being able to make a partial QTIP election. With such a partial election, the decedent’s estate can be divided between the surviving spouse and the credit shelter trust on the first death.22 Using a QTIP-able trust has two advantages over the disclaimer plan. First, the surviving spouse can have a special power of appointment over a QTIP-able credit shelter trust that enables the surviving spouse to change the disposition of the credit shelter trust. The surviving spouse cannot have a special power to appoint over disclaimed assets in a credit shelter trust because disclaimed assets cannot be subject to the direction of the person making the disclaimer. Also, a QTIP-able trust is beneficial in those states with a death tax that allow state-only QTIP elections.23
Formulas based on the estate tax exemption may be problematic in 2013. The estate tax exemption in 2013 might range from $10 million to $1 million. A formula based on the estate tax exemption might leave widely varying shares of the estate to the beneficiaries. If the federal estate tax is repealed beginning in 2013, a formula based on the estate tax exemption might not work or might be difficult to construe. The Wisconsin Legislature may amend Wis. Stat. section 854.30 so it applies in 2013 if the federal estate tax is repealed.
Under the author’s predictions, there is a 10 percent chance the federal estate tax exemption will be $1 million in 2013. Clients may be tempted to take the chance that the exemption in 2013 will be more than $1 million. However, statistical probability has little relevance with a sample of one.
To Learn More …
- See “IRS draft Form 8939 leaves estate tax preparers scratching their heads,” by Robert A. Mathers, WisBar InsideTrackTM, Jan. 19, 2011
The scope and breadth of the uncertainty between 2011 and 2013 is illustrated by the following two examples.
Example 1: Frank and Sophie are husband and wife. Their combined assets have a value of $1.5 million. They have a disclaimer estate plan. Sophie dies in 2010. If Frank does not disclaim, his estate will be $1.5 million. Frank can disclaim assets of $500,000 to keep his estate at $1 million. Should Frank disclaim? It is likely, but not certain, that his federal estate tax exemption will be more than $1.5 million if he dies in 2013. If Congress does not act and the exemption is $1 million in 2013, the federal estate tax on Frank’s estate would be about $200,000. The Wisconsin estate tax24 would be about $65,000 for a total of $265,000. A disclaimer of $500,000 by Frank would eliminate both the federal and the Wisconsin estate taxes.On the other hand, the new estate, gift, and GST tax provisions have the potential to benefit very large estates. The following example paraphrases one of the posts on the State Bar’s Real Property Probate and Trust Law Section electronic list, posted after President Obama signed the TRA 2010:
Example 2: “So, you are saying that a married couple in Wisconsin can have $10 million of assets. When the first spouse dies, there is no estate tax and a total step up in basis. Everything can pass to the surviving spouse with portability elected. Then, the assets appreciate to $20 million by the time of the surviving spouse’s death. The federal estate tax on the second death is $3.5 million ($10 million times 35 percent) and there is a total step up in basis on the second death?”
The answer is yes. The total estate tax and capital gain tax rate on the $20 million estate in that hypothetical is 17.5 percent. Of course, this assumes the federal and Wisconsin laws in effect in 2011 are in effect during the time period in the example.
The period from 2011 to 2013 will be one of great uncertainty for estate planners. Will Congress suffer the same paralysis in 2012 it suffered in 2010 as it deals with the sunset clause? There is no way to know.
1Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Pub. L. No. 107-16. See Michael W. Wilcox, Wisconsin’s New Estate Tax, 74 Wis. Law. 10 (December 2001).
2EGTRRA, supra note 1, § 901.
3The Taxpayer Relief Act of 1997, Pub. L. No. 105-34, provided for increasing the estate, gift, and GST tax exemptions to $1 million by 2006.
4The Taxpayer Relief Act of 1997 provided for inflation adjustments of the gift tax annual-exclusion and GST tax exemption amounts.
5Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010), Pub. L. No. 111-312.
6Wilcox, supra note 1.
7Most commentators and advisors use the term “exemption.” Technically, however, it is an exclusion. I.R.C. § 2010.
8Within the meaning of I.R.C. § 2203. This is the court-appointed personal representative or, if none, the person in possession of the assets.
9TRA 2010, supra note 5, § 303.
10Most commentators and advisors use the term “basis step-up,” although technically, the decedent’s basis is adjusted to fair market value at death, which might be a step down if the fair market value was less than the basis.
11Wis. Stat. § 701.20(4), (4g).
12See Robert A. Mathers, A Two-year Patch: 2010 Tax Relief Act Overview, 83 Wis. Law. 6 (February 2011).
13President Obama’s budget, released Feb. 14, 2011, assumes an exemption of $3.5 million after 2012.
14Price on Contemporary Estate Planning, § 2.24 et seq. (2011 edition).
15TRA 2010 § 301(d).
16TRA 2010 § 301(d)(1)(C).
17Wilcox, supra note 1.
182001 Wisconsin Act 16 (amending Wis. Stat. ch. 72).
19David W. Reinecke & Kate Botham, Time Runs Out on the Wisconsin Estate Tax, 80 Wis. Law. 20 (December 2007).
20Fox & Harding, 2011 State Death Tax Chart, mcquirewoods.com/news.
21See Susan Collins et al., Eckhardt’s Workbook for Wisconsin Estate Planners, § 6.150 (State Bar of Wisconsin PINNACLE 5th ed. 2008).
22Id. § 6.151.
23Wisconsin allowed a state-only QTIP with its estate tax. Announced by the Wisconsin Department of Revenue at the 2008 CLEW Tax Workshops.
24Gridlock at the federal level will bring back the Wisconsin estate tax. The exemption for Wisconsin purposes will be $1 million due to the 1997 Tax Act, unless Congress or the Wisconsin Legislature changes the law.