December 21, 2010 – In January we advised you that the federal estate tax was repealed for deaths occurring in 2010 and that the federal generation-skipping transfer (“GST”) tax was repealed for testamentary and lifetime transfers occurring in 2010. We also highlighted certain planning opportunities that appeared to exist in 2010 assuming Congress did not act to change the relevant federal tax laws during 2010. Continuing to keep you apprised of the most current information available for estate and gift tax planning, this letter is intended to highlight certain aspects of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed by President Obama on Friday, December 17, 2010 (the “Act”). Without additional Congressional action, the Act sunsets on December 31, 2012. On or before that date, Congress should pass new tax laws to define the federal estate, gift, and GST tax rules for future years.
Tax Exemptions and Rates. The Act grants each individual a $5 million applicable exclusion amount and establishes the maximum federal estate tax rate at 35%. This exemption and maximum rate apply for the estate, gift, and GST taxes. The Act provides that after January 1, 2011, individuals can make lifetime taxable gifts of up to $5 million (or $10 million for couples who elect to gift-split) without incurring gift tax liability. For most clients, this means that it is more advantageous to make taxable gifts in 2011 and 2012 than in 2010. The Act also reinstates the GST tax for transfers occurring after December 31, 2009. The Act creates a $5 million GST tax exemption and imposes a GST tax rate of zero percent for transfers made in 2010. For transfers made after 2010, the GST tax rate will be equal to the highest estate and gift tax rate in effect. Therefore, before the end of the year, clients may still be able to make “direct skip” transfers to grandchildren and more remote descendants without the imposition of GST tax (although the gift tax may still be applied to such transfers).
Portability of Estate Tax Exemptions. In the case of the death of both a husband and wife after December 31, 2010, the Act provides that an election may be made on the estate tax return filed in the first deceased spouse’s estate to allow the surviving spouse to increase his or her own estate tax exemption amount by any estate tax exemption amount that was “unused” in the predeceased spouse’s estate.
Estate Tax Related to 2010 Deaths. For deaths that occurred during 2010, the Act allows executors to choose whether to be subject to the new federal estate tax laws. If the new laws apply, estate tax is assessed at 35% of the value of all taxable property in excess of the applicable exclusion amount (or $5 million less amounts used during lifetime); however, the income tax basis of inherited property will equal the value of the property on the decedent’s date of the death (or the alternate value, if used). If the new laws do not apply, no estate tax is payable; however, the income tax basis of inherited property will be the lesser of the decedent’s basis or the value of the property on the decedent’s date of death, as adjusted by the executor by an amount up to $4.3 million. More specifically, $1.3 million of the basis adjustment may be applied to increase the basis of assets passing to anyone. An additional $3 million of basis adjustment may be applied to increase the basis of assets passing to a surviving spouse. Executors will need to evaluate which option is more favorable to the estate beneficiaries and make an election (and pay tax, if any) before nine months after the enactment of the Act.
This letter is a brief summary of very recent legislation. As more information regarding the new legislation becomes available, we will continue to provide updates. If you have any questions as to how these laws may affect your own estate planning or an estate or trust settlement for a death occurring in 2010, please contact your primary trust and estate attorney at Williams Parker. As always, you should make an appointment to review your estate plan every few years to ensure that it remains consistent with your intentions. Finally, if you have an email address to which you would like us to email any future mailings, please email firstname.lastname@example.org with your email address.
CIRCULAR 230 DISCLOSURE: To comply with Treasury Department Regulations, we advise you that, unless expressly indicated, any federal tax advice contained in this letter or any enclosures cannot be used for the purpose of (i) avoiding penalties imposed by the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any matters addressed herein. We make this disclosure because providers of tax advice are now required to do so by law when offering advice concerning federal tax matters.