By: Kyle C. McInnis

In the waning legislative twilight of 2010, the federal government passed the Tax Relief Act of 2010. This new law staved off imminent tax increases due to the expiration of the 2001 Bush tax cuts. In a major win for Republicans, the new law liberalized the federal transfer taxes generously. The specifics of the new law include a $5 million exemption for assets a person may transfer during their life or at their death (commonly called the "unified credit"), a significant decrease in the federal transfer tax rate from 55% to 35%, and the introduction of a concept known as "portability" that allows you to use any remaining and unused portion of your predeceasing spouse's $5 million amount at your death.

The most relevant change for affluent people is the increased $5 million unified credit. When combined with the portability concept, a married couple could transfer $10 million in assets. That alone might convince many people that they do not need an estate plan beyond a will. This assumption, however, is likely misplaced.

There are two prominent problems with the new law. First, it is temporary. The TRA of 2010 is set to expire in 2012, just in time for the presidential race. If it expires without another round of new law, we will return to the federal transfer tax laws in effect in 2000, which allowed for a $1 million unified credit per person. Second, there are many technical aspects of the portability concept that are still unresolved, such as issues regarding remarriage, privity, and timing issues. These problems are combined by the fact that to take advantage of the portability concept, both spouses must die in 2011 or 2012.

For person who have not planned their estates, some level of estate planning is still warranted. Every person should have a basic will, a medical power of attorney, and a living will. In addition, persons owning life insurance, especially forms of permanent insurance, should consider life insurance trust planning. The potential growth in the cash value of a policy when combined with the temporary nature of the $5 million unified credit, prompt a plan to exclude life insurance proceeds from your taxable estate at minimum transfer tax consequence as soon as possible.

Most taxpayers who had the foresight to plan their estate before the enactment of the new law will reexamine their plan wondering if their labyrinths of trusts, partnerships, and LLCs are still required to minimize their transfer taxes. The short answer is that your existing plan should likely stay in place, but a review is warranted.

For the wealthy family with assets in excess of $10 million, extensive estate planning is still wise, if not required. For the merely super-affluent family, with assets in excess of $5 million, but less than $10 million, estate planning is still highly advised, despite the diminished threat of federal transfer taxes. After all, the new law is temporary and subject to the political winds. Given the current budget deficit and debt levels of our country, it is just as likely that federal transfer taxes will increase in 2012 as stay the same or become more generous.

Many advanced estate planning techniques remain advantageous even if there is no transfer tax. Strategies such as irrevocable life insurance trusts, grantor trusts and family limited partnerships offer significant non-tax advantages that remain no matter the level of federal transfer taxes. These entities are often used to freeze or reduce appreciation of a potentially taxable estate, so estates of $5 million or above should still consider these techniques to make sure they stay under the unified credit amount or take advantage of the non-tax benefits of such planning.

While the new law has eased the current tax burdens on gifts and estate planning, it is so temporary that wholesale changes to existing estate plans are unwarranted. That new law is so temporary that it should not prevent affluent taxpayers from planning to provide significant flexibility to deal with existing and future laws and minimizing federal transfer taxes no matter what the political climate of the country.