Use It Before You Lose It” Planning Equally Applicable to LGBTQ and Unmarried Partners

In this month’s alert we examine how your clients, including LGBTQ clients and unmarried partners, can remove over $5 million free from estate tax and how this opportunity may be vanishing soon.

Unless Congress takes action before year-end, which most experts think is unlikely, the amount that can be passed free of estate tax will drop from $5.12 million to $1 million on January 1, 2013. For a decedent with an estate of $5 million, this would result in an increase in estate tax of $2,045,000.

Earlier this year, President Obama introduced his proposal to lower the estate tax exemption amount permanently from $5 million to $3.5 million and the lifetime gift tax exemption amount from $5 million to $1 million. This would essentially be the same as the law that was in effect in 2009. The maximum estate and gift tax rate would be fixed at 45% (up from 35% currently). The current “portability” provision, allowing the survivor to use the predeceasing spouse’s unused exemption, would be made permanent. Executors and lifetime donors would be required to report valuation and tax basis information to the IRS. This would enable the IRS to verify whether income tax gains are properly reported upon the future sale by the beneficiary. The President’s proposal would also tighten or eliminate many popular estate tax reduction strategies such as the Family Limited Partnership (“FLP”), Family Limited Liability Company (“FLLC”), Grantor Retained Annuity Trust (“GRAT”), and Sale to Defective Grantor Trust. With the pending election and the looming deficits, both the Republicans and the Democrats seem equally averse to tackling this subject prior to the election. If Congress fails to act, or if the President’s proposal is adopted, there would be tremendous savings available to taxpayers who act now to utilize the current, perhaps short-lived, $5.12 million exemption amount before it disappears at year-end.

Our previous alerts regarding using the current exemption amount prior to expiration have primarily concerned planning for married couples. However, the planning options available to “lock-in” the current $5.12 million exemption are available equally to gay and lesbian couples, as well as opposite sex unmarried partners. LGBTQ couples (whether or not married) and unmarried couples are not eligible for the unlimited marital deduction that postpones estate taxation until the death of the surviving spouse for traditional married couples. Because of this, it is critical that LGBTQ and unmarried partners with substantial wealth see an estate planning attorney who is experienced with these planning strategies in order to take advantage of the current opportunities available to them. Failure to complete this planning before year-end may result in the surviving partner being saddled with substantial estate tax at the death of the first partner to die. This will result in a decrease in the income and assets available to the surviving partner. Engaging in planning today to “lock-in” the $5.12 million exemption amount can preserve the income and assets available to the surviving partner.

Our office focuses on estate planning strategies for clients of all wealth levels, including clients who will be subject to estate tax at death. We also have extensive experience in estate planning for LGBTQ couples and unmarried opposite sex partners. Other services we offer include planning to escape generational estate taxation through the use of generation-skipping or dynasty trusts, asset protection strategies, as well as estate and trust administration. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up to date with information regarding tax developments as well as cutting edge planning strategies for persons of all wealth levels. You can get more information about a complimentary review of your clients’ existing estate plans and our planning and administration services by calling or by visiting our website.