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The Ghost of Anna Nicole Smith and an Gift Tax Opportunity until December 31, 2012

The Ghost of Anna Nicole Smith visited me to discuss a unique tax saving opportunity, which is set to expire at the end of this year.


You may remember Anna Nicole, the Playmate who parlayed her Playboy fame into a modern tragic-comedy of sorts – if I may say that without offending.  But to get to the point of my recent “discussion” with Ms. Smith, I borrow from her entry in Wikipedia: “Her highly publicized second marriage to oil business mogul J. Howard Marshall, 62 years her senior, resulted in speculation that she married the octogenarian for his money, which she denied. Following Marshall’s death, Smith began a lengthy legal battle over a share of his estate.”

When the case of The Estate of Mr. Marshall was a newsworthy item, my friend Hywel and I would often debate the merits of estate planning and estate taxation.  Hywel was a free-marketeer and general libertarian and his attitude was that Mr. Marshall should be able to leave his wealth to whomever he ****** well pleased.  As a lawyer by trade, and certainly as less of a free spirit than Hywel, I made arguments about undue influence and the ability of Mr. Marshall to make rational decisions when faced with certain body parts, which were 62 years younger than his own.

On a more philosophical plane, Hywel argued that most modern tax codes had it all wrong when it came to our ability to make choices about the passing of wealth from one generation to another, or one person to another, that lifetime transfers, called “gifts”, should be allowed free of tax and argue that the estate tax should be onerous, confiscatory.  This system would create incentives for Mom & Dad to pass wealth to their children while they were still alive, so they could witness the enjoyment, and hopefully productive uses of this wealth.  To Hywel, transfers at death did not bring joy and satisfaction to the donor – who is dead – and often lead to lengthy and costly court battles.  For example, if Mr. Marshall was still alive, and if he lived in a system which encouraged gifting, he could have made lifetime gifts to Anna Nicole Smith and personally testified if claims were made about undue influences.

Despite what you may be thinking about my influences by now, my thoughts about Anna Nicole were strictly professional.  For those of you who are not familiar with the current state of US estate and gift taxation, here is a recap:

  • 2001: President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) under which federal estate and generation skipping tax exemptions increased from $675,000 in 2001 to $3,500,000 in 2009.
  • 2010: A strange year where US estate and generation-skipping taxes were essentially repealed, making our best advice to clients to be “die now” as there is no estate tax; fortunately not many followed our advice.
  • December 17, 2010: President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (TRA).  Had this act not been passed, EGTRRA would have “sunset” on December 31, 2010 and we would have been back in 2001 and the $675,000 exemption.

How the TRA created a strange 2010 was twofold:

  1. Confirmed the estates of persons who died in 2010 were not subject to estate tax.
  2. Allowed a choice for an estate tax exemption in 2010 set at $5,000,000 and a 35% tax rate applying to transfers over that amount.  Where an estate chose the $5,000,000 exemption its beneficiaries obtained a step-up in basis in the assets they received, while an estate choosing the unlimited exemption passed assets with their historical basis.

One of the anomalies of EGTRRA was that although it increased the tax exemption for estates and generation-skipping transfers, it froze the gift tax exemption at $1,000,000 from 2002 through 2010.  Historically the exemption was a “unified” exemption – meaning that it applied to all lifetime transfers.  In other words, the estate of person who died in 2001 and who had previously gifted $675,000 (the amount of the unified exemption in that year) was not allowed any further exemption.  But in 2009, gifts up to $1,000,000 were exempt, while estates were exempt up to $3,500,000, less any previously exempt gifts.

More importantly for this discussion and getting to the opportunity, the TRA provided a 2 year “stopgap” to the sun-setting of EGTRRA that allows the estates of persons dying in 2011 and 2012 a $5,000,000 unified estate, gift and generation skipping tax exemption. 

In addition to its 2 year plug, the TRA also re-unified the exemption system by providing that gifts, generation-skipping transfers and distributions from estates have a total, cumulative exemption of up to $5,000,000 (actually $5,120,000 in 2012).

Congress is, of course, busy with the issue and there have numerous proposed and pending bills such as the Sensible Estate Tax Relief Act of 2012, End Tax Uncertainty Act of 2011, Fair and Simple Tax Act of 2011.  President Obama’s 2013 budget proposal includes a proposal that establishes the generation-skipping and estate tax exemption of $3,500,000 (as it was in 2009), but with 45% tax rate (the 2009 and current tax rate is 35%).  Obama’s 2013 budget proposal also separates (de-unifies?) the lifetime gift tax exemption and seeks a $1,000,000 lifetime gift tax exemption and a 45% gift tax rate.

2012 being an election year, it’s anyone’s guess what may happen.  About.com breaks it down quite well dividing Congress into three camps: The Extenders, The Conformers and The Reverters.

Which brings me back to Anna Nicole, or more precisely to Hywel and his free-wheeling ideas about the passing of wealth.  His system is now a reality. It provides a real tax incentive to engage in lifetime gifting:

  • Up to $5,000,000 free of gift tax, subject to a 35% tax rate for transfers over that amount.

This incentive is only available until December 31, 2012.  After that, the system defaults back to gifts of $1,000,000 free of gift tax and subject to a 55% tax rate for transfers over that amount.

It is of course too late for Mr. Marshall and poor Anna Nicole, but it’s not yet too late for US persons who want to plan transfers of wealth, including transfers in trust which can provide benefits over time and to future generations.  We are therefore encouraging clients to come in and discuss their options, because if you are considering some lifetime gifts to loved ones, the time to take action is now.

Please contact me if you have any questions: g.dean@ustaxfs.ch


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