Tax Breaks for estates, gifts may not last

The world of estate and gift tax has never been known for exciting plot twists. But 2010 turned in to a real cliffhanger.

It started with the one-year repeal of the federal estate tax so that even the wealthiest individuals “lucky” enough to die last year were able to transfer their assets free of any federal estate tax.

If the “lucky” individual happened to live in Oklahoma, he would also transfer his assets free of state estate tax due to Oklahoma’s permanent repeal of its own estate tax beginning in 2010.

Even the television show Law & Order recognized that this temporary “free pass” on estate taxes could provide a good storyline with an episode about a family accused of manipulating the timing of their wealthy grandfather’s death so that they might receive a larger inheritance.

Ironically, the law that gave us the disappearing estate tax was itself slated to disappear on December 31, 2010, and taxes on estates and gifts were scheduled to dramatically increase in 2011. Everyone (okay, maybe not everyone) waited on the edge of their seats to see if Congress and President Obama would really let these tax increases go into effect. Not until December 17, when the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (the “Act”) was made law, did we have an answer – a resounding “No.”

Many aspects of the Act have been widely reported, including the increase of the amount an individual can give away without tax during life or at death (the estate and gift tax exemption) up to $5,000,000.

The Act also added a new and interesting twist to the estate and gift tax rules called “spousal portability.” Simply put, spousal portability allows a married couple to share between them a total of $10,000,000 in federal estate and gift tax exemptions to transfer assets during life or at death. Before 2011 and the Act, if one spouse did not use his or her individual exemption amount, it was lost. Under the old “use it or lose it” rules, wealthier families who did not engage in sophisticated planning risked paying estate or gift tax unnecessarily.

Now, with the new portability provisions, as long as certain requirements are met, what one spouse does not use may be used by the other. For example: John and Jane are married, live in Oklahoma, and have total assets of $7,000,000. If Jane passes away in 2011 leaving everything to John, Jane has not used any of her individual $5,000,000 exemption amount and pays no federal estate tax (spouses may pass an unlimited amount of assets to each other tax free at death due to the unlimited marital deduction). When John later passes away, he will be able to transfer to his heirs federal and state estate tax free assets worth up to $10,000,000 (John’s $5,000,000 exemption plus Jane’s unused $5,000,000 exemption).

It is important to note that the Act, including the higher exemption amounts and the spousal portability provisions, will expire on December 31, 2012.

While the Act’s higher exemption amounts and new portability provisions may provide some protection for those wealthier families without proper estate plans in place, it is important to point out that an up to date estate plan is as important today as it ever has been. Remember, the current laws are set to expire in 2012 and no one knows exactly what will take their place.

And finally, good estate planning is driven by more than just taxes. A good estate plan can ensure that the assets you worked hard to acquire are passed on to those you most wish to benefit and that your financial values are passed down to the next generations. What could be more important than that?

Joanna K. Murphy, J.D., LL.M., is a trust and financial advisor with Trust Company of Oklahoma,, the state’s largest and oldest independent trust company. Before joining Trust Company in 2010, Murphy served as vice president and trust officer for Citigroup in New York and Zurich, Switzerland. Trust Company has locations in Tulsa, Oklahoma City, and Muskogee and manages over $2 billion in assets for its clients.