Montgomery County Estate Lawyer

Because of the operation of the inclusion ratio, it is beneficial to arrange for transfers to trust to have an inclusion ratio of either 0.0 or 1.0.  Let’s assume that a terminally ill elderly client wishes to put $3 million into trust for the benefit of her only child during the child’s lifetime, with the remainder to her grandchildren upon her child’s death.  During the child’s lifetime, the child shall be entitled to all income, and an independent trustee will be able to make discretionary payments of principal to the child.  Indeed, principal will be distributed from time to time to the child.  The entire $1.5 million GST tax exemption is then allocated to the trust.  IRC Section 2642 provides that the trust will have an “inclusion ratio” of .5.  During the lifetime of the child, the child receives $1.5 million in distributions, plus all of the income.  Further assume that $2.0 million remains in the trust.  

Upon the death of the child, there will be a Taxable Termination, so that .5 of the principal payable to the grandchildren will be subject to the GST tax, since .5 is the amount of the inclusion ratio.  Thus, of the $2.0 million distributed to the grandchildren, $1.0 million will be subject to GST tax at a rate of 47%, thereby resulting in a tax liability of $470,000.  

However, the client of the Montgomery County estate lawyer could have completely avoided the GST tax by having created two separate trusts.  The first trust would have been funded with $1.5 million, to which the entire $1.5 million GST tax exemption would have been allocated (the “GST Exempt Trust”).  The GST Exempt Trust would have an inclusion ratio of 0.0.  The second trust would have been allocated no GST tax exemption, and therefore it would have an inclusion ratio of 1.0 (the “GST Non-Exempt Trust”).  The GST Exempt Trust would contain a provision saying that no distributions shall be made to child from that trust until the GST Non-Exempt Trust was exhausted, and thus the entire $1.5 million of distributions to the child would come from the GST Non-Exempt Trust.  The entire GST Exempt Trust, worth $2 million on the child’s death, will pass to the grandchildren without any further estate, gift, or GST tax.  

In the event that an existing trust in Montgomery County has an inclusion ratio of less than 1 but greater than zero, and discretionary distributions can be made to both skip persons and non-skip persons, the issue arises as to whether the trust can be severed to create 2 separate trusts -- one with an inclusion ratio of 0.0 and one with an inclusion ratio of 1.0.  Prior to the EGTRRA, it was nearly impossible to sever trusts with a fractional inclusion ratio without giving both resulting trusts the same inclusion ratio that belonged to the original trust.  If a trust was only partially exempt from the GST tax, it was the IRS position that any separation of the trust would cause all resulting trusts to have the same fractional exemption from the GST tax.  

The problem was significantly alleviated by the enactment of IRC Section 2642(a)(3) as part of the 2001 Tax Act.  That section provides that a trust can be divided into a fully exempt portion, and a fully non-exempt portion, so long as the division is a “qualified severance”.   The section defines a qualified severance as a division of a single trust and the creation (by any means available under the governing instrument or under local law) of two or more trusts if:

1)  the single trust was divided on a fractional basis, and

2)  the terms of the new trusts, in the aggregate, provide for the same succession of interests of beneficiaries as are provided in the original trust.  

Further, the severance of a partially exempt trust to be a qualified severance, the trust must be severed in a way that creates one trust with a GST inclusion ratio of 0.0 and one trust with a GST inclusion of a ratio of 1.0.  

It is important to note that the statute requires division on a fractional basis (if you are confused at this point, call your Montgomery County estate lawyer), rather than using a pecuniary amount.  However, this does not require that each new trust receive a proportionate ownership of each underlying asset, so long as the funding of the post-severance trusts uses fair market values at the time of distribution.  

Similarly, the need for the trusts to provide the same succession interests does not mean that each trust must function with identical beneficiaries to the severed trust.  But, how does one sever a trust where there is a spray power which could theoretically end up assisting only one family line if not severed (i.e. because of the possibility that one beneficiary could have significant distribution for education, medical costs, etc.)?  The proposed regulations permit the severance of such a trust along family lines.  Attention should also be given to Proposed Treas. Reg. Section 26.2642-1(a), which requires rounding of the applicable severance fraction to the nearest one-thousandth (.001).  Do not use pecuniary amounts to define the severance, and do not use fractions when presenting the severance (i.e. use .333 rather than ⅓).  

The reporting of a qualified severance is to be made via the filing of IRS Form 706-GS(T), which is a pre-existing form that is used to report Taxable Terminations of trusts.  As a result, the form is not designed to address the qualified severance issue.  Therefore, tax preparers should print “Qualified Severance” at the top of the form, and attach a notice that provides the following regarding the trust: name and identity of the trust being severed, the name of the transferor, the date of the creation of the trust being severed, the EIN of the trust being severed, and the inclusion ratio prior to severance.  

Credit shelter trusts have been a very popular part of estate planning for decades. While recent changes have greatly reduced the need for this planning technique it is important for estate planners to understand this technique because it is still often found in documents which may be in place for clients. In addition, there are states which maintain lower state estate tax exemptions despite increases at the federal level. If clients live or own property in other states it may still be necessary to utilize this planning technique to obtain the most favorable tax result for such clients. The name credit shelter trust is derived from the process which takes place at the death of the first spouse and how the available tax credits offset potential federal estate taxes to minimize the overall estate tax liability of a married couple. In essence, the estate of the first spouse to die is divided into two portions of which one part is distributed to a trust for beneficiaries, typically children, with some limited rights provided to the surviving spouse for use during their lifetime. The second part is distributed into another trust which holds property for the surviving spouse and can be used for anything the surviving spouse chooses. The trust under this type of planning strategy referred to using several different terms but the results are typically the same.

This type of planning is often referred to generally as A–B trust planning because it is made up of two separate trusts which serve different purposes. Trust A is commonly referred to as the marital trust, QTIP trust, or marital deduction trust while Trust B is referred to as the credit shelter trust, bypass trust, or family trust. Ultimately the goal is to avoid wasting any tax credits or exemptions that may be available to a married couple when the first spouse passes. One trust, set up by your Montgomery County estate lawyer, known typically as Trust B, is funded with an amount up to the maximum unified credit the first to die spouse has available at the time of death parentheses or more commonly the state death tax exemption amount in today's text climate and premise.

The other trust, Trust A, will receive the remaining assets so the spouse can use them however they see fit and then will pass the assets to beneficiaries when they die as part of their own estate. While this formulaic estate and tax planning approach is designed to maximize benefits under the state tax rules, significant changes to the estate tax laws over the last few years have significantly impacted this planning technique. A more detailed explanation with examples on how the distributions are made is outlined when you discuss specific marital deduction trusts, but is important to note that this planning technique remains a viable option for states to apply state estate taxes to estates valued far below the federal exemption levels and do not allow portability of their exemptions between spouses.

Specifically, New York and New Jersey have maintained lower state tax exemptions without portability provisions have just $1 million and $675,000 respectively. If clients live or own property, especially vacation properties which are popular for residents of Pennsylvania, it may be beneficial to implement these techniques. In 2010 the federal estate tax rules were changed to allow up to $5 million to pass free of federal estate tax to decedent’s beneficiaries. This amount is also tied to inflation so in 2013 a person can exempt up to $5.25 million per person from federal estate tax using the available unused credit. In addition, a portability provision was added allowing a surviving spouse to use any or all of a spouse's exemption that was not used at the first death to pass a total of $10.5 million to beneficiaries without federal estate tax in 2013. Due to these changes it is also important for estate planners to recognize formula based A–B trust planning that may be present in client’s current documents to ensure their needs are still being met. While many individuals may have met the $1 million exemption and require this planning a decade or so ago, a formula requiring the first $5.25 million to be deposited into credit shelter trust for beneficiaries may have the unintended result of leaving little or nothing for the surviving spouse out right. For this reason it is important to understand and discuss these planning techniques with clients to ensure their state planning is properly reflected with their intentions and stated goals.

Revocable trusts or a common tool for use in estate planning. They offer planning opportunities not found with a traditional will yet maintain considerable flexibility for the person establishing the trust. Revocable trusts or simply an extension of the person who sets some up, typically referred to as the grantor, while they are alive and any trust assets can be accessed, altered, or sold just as if the asset was not part of the trust property. The simple will can suffice to transferestate assets after death but often there are other considerations that people would like to make Witchi simple will just won't cover. Some of these include additional privacy, reduced time or expense of estate administration, and asset management in the event of incapacity.

Estates are public record in the information that was filed during the probate process is available to anyone who would like to go to the register of wills office in Montgomery County where the decedent was a resident when they passed away and paying any applicable charges for duplication of the records. While celebrities and the very wealthy they simply wish to have some additional privacy to shield their family from public scrutiny after they die, most people don't need to worry about reporters or other random people seeking their estate information. That still doesn't mean that others are worried about privacy for other reasons however. Maybe the decedent has decided to leave their assets eight this proportional amount or to cut a certain individual out of the distribution of their estate entirely. This is perfectly acceptable, and quite common, but often can result in hurt feelings, interfamily disputes and sometimes a challenge to a will. For those seeking to avoid such disagreement, a revocable trust offers a simple alternative. The trust document can keep this information out of the public record and therefore avoid many of these potential issues.

A revocable trust can also offer some additional simplicity with respect to estate distribution and administration. The executory of an estate is required to find and accumulate the assets of the decedent so they can be consolidated and distributed to the named beneficiaries. People often have various assets in places that may not be obvious to executory and therefore may be difficult to locate or manage. By creating a trust and placing property into it, an individual can keep their assets together and make it much easier for an executory to locate manage. This can also save some time and cost associated with the distribution of the state because assets will already be in order and may only need to be liquidated or distributed in kind per the decedents instructions. Keeping assets in trust, and directing other assets to the trust at death, will also keep such assets out of probate. Probate in Pennsylvania is not particularly expensive or difficult, but other states such as Florida have much more challenging probate processes which may wish to be avoided to save additional time and cost for the state and the beneficiaries.

Finally, revocable living trusts also have an added benefit that is often overlooked during the estate planning process. Since the focus is usually on what will happen at death consideration may not be given to catastrophic events during the life of an individual. Sometimes a debilitating disease, a car accident, or other unexpected event will not kill a person believe them incapacitated and unable to manage their assets. By setting up a revocable living trust the grantor can appoint another individual they trust or a bank or other institution to manage their assets for them in the event they are no longer able. Estate plans should consider all sorts of possible scenarios while no one likes to think they will end up incapacitated at some point in their life, with people living longer lives there never and the increasing advancements in medical care this is a very real possibility that should be considered with any comprehensive estate plan.

The UTA codifies compensation at Section 7768 of the PEF code. If one is specified in the trust instrument, the trustee is entitled to compensation that is reasonable under the circumstances. If specified, a court is still permitted to adjust the amount paid to the trustee that is more or less than that specified if: 1) the duties of the trustee have become substantially different from those contemplated when the trust was created or when the fee agreement was executed; 2) the compensation specified in the trust instrument or fee agreement would be unreasonable; or 3) the trustee performed extraordinary services, and the trust instrument or fee agreement does not specify the trustees compensation for those services.

The trustee may still be entitled to compensation from the income or principal of a trust even if: one the trust is perpetual or for any other reason has not yet terminated; to the trustees term of office is not yet ended; or three the trustee of a testamentary trust also acted as the personal representative of the settler and was or might have been compensated for services as a personal representatives from the settlor's estate.

Trustee Duties and Responsibilities

The duties and powers of trustees are covered in Section 7771-7780.7 and by a Montgomery County estate lawyer. The trustee has the following duties:

Duty to administer the trust: The trustee shall administer the trust in good faith, in accordance with the provisions of the trust and the purposes and interests of the beneficiaries and in accordance with applicable law.

Duty of loyalty: The trustee is a fiduciary and should administer the trust solely for the interests of the beneficiaries. Any transaction with the trustee that creates a conflict of interest must be authorized by the trust, approved by court, or have been authorized (or waived by inaction) of the beneficiary.  The trustee must be impartial and very careful regarding the exercise of any transaction which presents a conflict between the trustee and the best interests of the beneficiary.

Impartiality: When the trust has more than two beneficiaries, the trustee shall act impartially in investing, managing and distributing the property. A trustee does not need to deal with all beneficiaries equally, but the trustee does have a duty to deal with beneficiaries equitably.

Prudent administration: The trustee shall administer the trust is a prudent person would, by considering the purposes, provisions, distribution requirements, and other circumstances of the trust and by exercising reasonable care, skill and caution.

Trustee's Skills:  A trustee with special skills relevant to the trust administration must use those special skills or expertise in the ministration of the trust. Presumably, the trustee was selected by the settlor with the expectation they would use their skills.

Delegation: A trustee may delegate its duties to others, but it must exercise reasonable care, skill and caution in selecting agent, establishing the scope and specific terms of delegation, consist with the purposes and provisions of the trust, and reviewing periodically the agents actions in order to monitor the agents performance and compliance with the scope and specific terms of delegation. A trustee who complied with subsection (a) of section 7777 is not liable to the beneficiaries or the trust for whom the function was delegated.

Duty to inform and report: The trustee shall promptly respond to a beneficiaries reasonable request for information related to the trusts administration. Notice must be provided to beneficiaries of trusts when the settlor has been adjudicated incompetent or has died.

Their other duties for the trustee which include controlled protection of trust property, recordkeeping and identification of trust property, and enforcement and defense of claims.

This is a post about the Generation Skipping Transfer Tax (GST). The purpose for the enactment of the GST tax was to limit the erosion of the federal estate tax base through taxpayer's use of gifts to grandchildren or more remote generations, either by way of direct gifts or gifts in trust. The GST tax accomplishes the purpose by taxing transfers that skip generations, to the extent that the transfers are not protected by the GST tax exemption. Recall that a transferor is generally the donor of a completed gift federal gift tax purposes, or a decedent for federal estate tax purposes. And, remember that a Skip Person is a term that refers to someone that is more than one generation below the generation of the Transferor. For donees, or legatees, that are not related to the transferor, they will generally be considered Skip Persons if they are more than 37.5 years younger than the transfer. A trust can be a Skip Person if either:

i) all interests in the trust are held by Skip Persons, or

ii) the only current beneficiaries are skip persons, and so long as a trust distribution cannot be made to a Non-Skip Person.

Finally, remember that a non-Skip Person is any person or trust that is not a Skip Person (which seems rather obvious).

Types of GST

There are various types of GST transfers. A GST transfer can come in the form of a "direct skip ", a "taxable termination", or a "taxable distribution", and each of them is determined in reference to a transferor. A direct skip involves the direct transfer to a skip person, either during their lifetime or at death.  A taxable termination occurs when a transfer is made to a skip person on termination of the trust. And finally, a taxable distribution occurs when there is a regular distribution (of principle or income) from a trust to a skip person. A skip person is someone that is more than one generation below the generation of the transfer. For donees or legatees that are not related to the transferor, they will generally be considered Skip persons if they are more than 37.5 years younger than the transfer. A trust can be a skip person if all the beneficiaries or skip persons, and so long as a trust distribution cannot be made to a non-Skip  person.

GST tax and inclusion ratio

This is a post about the GST tax exemption and the inclusion ratio. A transferors GST tax exemption may be allocated to a transfer so I was to pass completely or partially free of the GST tax. The extent to which a transfer passes without GST tax will depend upon the "inclusion ratio", which is determined by the following formula: 1.0 - (Amount GST Allocated/Amount of Transfer). To illustrate, let's assume that A makes a gift of $1 million to a trust that pays income to A’s children for their lifetimes, with principal passing on termination to A’ grandchildren. A then allocates $500,000 of A’s GST tax exemption to the trust. The inclusion ratio will be .50, arrived at as follows: 1.0 - ($500,000 divided by $1,000,000). Therefore, upon distribution of the remainder to the grandchildren, one half of each remainder distribution will be subject to GST tax (unless the parent of the grandchildren predeceased the transfer into the trust).

Methods of allocating GST

This is a post about the methods of allocating the GST tax exemption. The primary means of reporting an allocation of the GST tax exemption to a lifetime transfer is to report it on a timely filed gift tax return for the year of the transfer, in which case the allocation is effective at the value of the transferred property at the time of the transfer. However, if the timely allocation of the GST tax exemption is not made for a lifetime gift, the grantor can make a late allocation at any time prior to his or her death by filing a late gift tax return, and the personal representative of his or her estate may make a late allocation on a federal estate tax return. If a late election is filed, it is effective as of the date of filing of the allocation. Once made, the allocation is a revocable. If the full GST tax exemption is not made on or before the due date of the taxpayers federal estate tax return, the taxpayer’s remaining GST tax exemption will be automatically allocated.

Another opportunity for your Montgomery County estate lawyer is a deemed allocation as a lifetime transfer. If a taxpayer makes a lifetime gift that is the direct skip, the taxpayers remaining GST tax exemption will be allocated to that transfer in an amount necessary to get to a zero inclusion ratio. The taxpayer is given the ability to opt-out of this the deemed allocation either by paying the GST tax, or by making an election out. The election out of the deemed allocation must be made on a timely filed gift tax return. Though the election out of the deemed allocation is irrevocable once made, in the case of a direct skip to a trust, the taxpayer or the taxpayer’s executor may make a late allocation of GST tax exemption to the trust to limit the GST tax on later taxable distributions or taxable terminations. Some lifetime direct skips may be delayed because the transfer is subject to inclusion in the transferor's estate (which causes an estate tax inclusion). In that case, the direct skip doesn't occur until the end of the ETIP period.

Yet another opportunity is for indirect skips, where the deemed allocation rules also apply to certain transfers to trusts. An indirect skip is defined as a lifetime transfer of property subject to the gift tax that is not a direct skip, and that is a transfer to a GST trust. A GST trust is a trust that could have a generation skipping transfer with regard to the transfer in the future. A transfer is subject to GST tax even if the transfer qualifies for the annual exclusion under IRC section 2503(b).  If a trust is classified as a GST trust under IRC section 2632(c), and it meets the other requirements, then the amount deemed allocated to the transferred property will be the amount necessary to get an inclusion ratio of zero. The taxpayer may elect out of the automatic allocation to an indirect skip on a timely file gift tax return for the calendar year of the indirect skip. The trust which does not meet the definition of a GST trust can elect to be a GST trust for particular transfer or transfers during a calendar year.

There is also the possibility of a retroactive allocation. The IRC permits retroactive allocations of the GST tax exemption in certain narrow circumstances. Retroactive allocations are distinguished from late allocations, the latter of which can be more freely made with different consequences. IRC section 2632 – D allows a tax payer to allocate unused GST tax exemption to a trust created by the taxpayer, if there a natural order of death in the tax payer/transfer is still living at that time and has unused GST tax exemption. For example, assume that a taxpayer creates an irrevocable life insurance trust for the benefit of her husband and children on January 1, 2005. The children will be entitled to principal upon the death of the spouse. The taxpayer begins to fund the trust, and decides not to allocate any GST tax exemption the trust may have because the tax pair expects all distributions of principle to be made to non-skip persons. However, in 2009, one of the taxpayer's children passes away, such that the child’s share will go to his surviving children on the spouse's death.  The GST will apply to the entire amount of principal distributions to the grandchildren. To remedy the situation, IRC section 2632(d) permits a retroactive allocation in this scenario. The basic requirement for retroactive allocation is that there be an unnatural order of death of a non-skip person, and that non-skip person must: i) be a lineal descendent of a grandparent of the transferor’s current or former spouse, ii) be assigned to a generation below the generation level of the transfer; and iii) must predecease the transferor. The election will be effective immediately prior to the non-skip person's death, but the value used for purposes of determining the allocation amount will be the date the property is transferred. If the retroactive allocation is to be made where there is an open ETIP, the effect of the retroactive allocation of the GST tax exemption will be delayed until the close of the ETIP.

The final method of allocating the GST tax exemption is an allocation upon death. There are four basic types of transfers to which the GST tax exemption can be allocated at a transferors death: 1) direct skips occurring at death; 2) property held in trust but included in the transferors estate; 3) property held in trust not included in the transfer wars estate; and 4) lifetime direct skips or indirect skips made during transferor’s lifetime but transfer or died before the expiration for making a timely allocation. If there's no active allocation to a decedent’s unused GST tax exemption within these categories, it will be automatically allocated in the following order: to the nonexempt value of property that constitutes a direct skip occurring at the transfer/decedent’s death, to the nonexempt value of property held in trust with respect to which the decedent is the transfer, and which might result in a capital taxable termination or taxable distribution in the future, to the nonexempt value of property upon the disposition of cessation of use of IRC section 2032(a) property.

Just as the estate freeze concept argues in favor of using a client’s Unified Credit via lifetime gifts rather than testamentary transfers, the GST tax exemption is better utilized via lifetime transfers.  For example, let’s assume that a grantor wishes to give 25% of his $4 million estate to his grandchildren.  The grantor makes a gift of $1 million in trust today, and allocates $1 million of the grantor’s GST tax exemption to the trust.  Thus, the inclusion ratio is zero.  The trust will pay income to the grantor’s children for life, with remainder over to the grandchildren upon the death of the grantor.  The $1 million gift to the grantor then grows in value over time, so that upon the death of the grantor 20 years later, the trust is worth $5 million.  The distribution of the $5 million to the grandchildren is a Taxable Termination.  However, because the inclusion ratio is zero as set up by your Montgomery County estate lawyer, there is no amount to be included in calculating the GST tax on the transfer.  

A Qualified Terminable Interest Property (QTIP) trust is a type of trust that allows the grantor to provide for a surviving spouse during their lifetime but maintain control over the trusts principal assets so they may be distributed to the decedent's chosen beneficiaries after the surviving spouse has also died. QTIP trusts are very similar to the A–B trust arrangements outlined normally in credit shelter and marital deduction trusts but are also slightly more restrictive. A QTIP trust usually provides a life estate type benefit to the surviving spouse so they will receive the income from the trust and the right to use any real estate that is contributed to the QTIP trust. It is very important to talk to a Montgomery County estate lawyer about your options in this realm of estate planning.  

Unlike other trusts in the A–B type arrangement however, the surviving spouse does not have any other control over the property and is not allowed to have discretionary distributions from the trust principle that exceed the greater of $5000 or 5% of the trust assets (although even those may be disallowed by the grantor).  

Most commonly, QTIP trusts are used by those who have been married previously and wish to leave some benefit in the right to use property to their second or third spouse while leaving the trust assets themselves to their children from their first marriage. The surviving spouse is unable to spend down or sell assets contained in a QTIP trust, nor can they assign the property to another individual they may choose to designate a beneficiary for other property the surviving spouse may own themselves.  Essentially, it gives the first spouse to die control over the assets to ensure they ultimately end up in the hands of those they choose rather than through the discretion of the surviving spouse or anyone else. QTIP trusts continued to remain popular, specifically with those who seek control over the trust assets following their death. The additional benefit of a QTIP trust is that the assets passing to the trust, so long as they provide all the income and very limited distributions of principle to the surviving spouse, still call five for the marital deduction. This means that the assets pass free of tax like anything else going to the surviving spouse, and then is state taxes are assessed as necessary after the death of the surviving spouse. The assets are also protected from creditors in any new husband or wife that could enter the picture after their death because the surviving spouse does not have the right to invade that principle except in limited circumstances and for limited amounts.

Prior to the 2010 act titled Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the federal estate and generation – skipping transfer taxes have been repealed during 2010 by reason of the provisions of the "economic growth and tax relief reconciliation act of 2001", the gift tax remained. With that repeal came changes to the federal income tax rules for all Montgomery County estate lawyers, such that there was to be limited "step up" in income tax basis upon the death of a taxpayer. But 2001’s repeal of the federal estate, gift and GST taxes, and corresponding income tax changes,were scheduled to expire on December 31, 2010.

 Upon expiration, the federal estate and GST taxes were to return via the revival of the pre-2001 law, with a modest exemption from the federal estate and GST tax of $1 million per individual, and with a top estate, gift and GST tax rate of 55%.  All that changed with the enactment of the 2010 act. The federal estate in GST taxes have been reinstated effective January 1, 2011, and the gift tax remains. However, the estate, gift and GST tax regime under the 2010 act is quite different than it was prior to 2010.

The key components of the new structure or is follows:

1) The estate, gift and GST tax rates are reduced to 35%, as compared to a top rate of up to 45% under EGTRRA and 55% under pre-2001 law.

2) There is an estate and GST tax exemption amount of $5 million per individual (and up to $10 million for married persons), as compared to $3,500,000 in 2009 under 2001, and $1 million under pre-2001 law.

3) The gift tax exemption is once again "unified" with the state and GST tax exemption, such that the gift tax exemption is also $5 million. This is in contrast to the $1 million exemption that had been in place under 2001, and now allows for greater gifting of assets during lifetime without incurring gift tax.

4) The $5 million estate tax exemption amount is "portable" between spouses, which is in stark contrast to prior law.  Under prior law, the exemption was not portable. As a result, under prior law, the decedent would need to leave assets in trust for the surviving spouse (a so-called "bypass" or credit shelter" trust) if he or she wanted to benefit the surviving spouse and get the use of the decedent's estate tax exemption. With portability, such trusts are not necessary to preserve and use a pre-deceasing spouse's estate tax exemption.

5) The $5 million GST tax exemption is not portable, so that transfers to trusts or direct transfers to grandchildren will be necessary to utilize a pre-deceasing spouse’s GST tax exemption.

8) But, all the foregoing provisions expire on December 31, 2012, and the provisions of 2001 return on January 1, 2013. This would bring a $1 million estate, gift and GST tax exemption, though the GST tax exemption would be adjusted for inflation  using 2001 as a base year. It would also bring the return of a top tax estate, gift and GST tax rate of 55%.