On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”). This Act provides temporary federal estate and gift tax relief that opens up opportunities for transferring assets out of your taxable estate without incurring gift taxes.
Changes for 2010. For decedents who died in 2010, the Act reinstated the federal estate tax with an exemption of $5 million, a tax rate of 35% for amounts in excess of the exemption, and a full step-up in basis. For estates of individuals who died in 2010 with estates in excess of $5 million, there is an option to elect to have no estate tax apply, but with a modified carryover basis that provides only a limited step-up in basis.
2011 and 2012. For this year and next, the exemption for both federal estate and gift taxes is increased to $5 million. And the tax rate on amounts in excess of $5 million is 35%. Prior to passage of the Act, the exemptions were going to revert to $1 million and the rate on any excess amounts would have ranged from 37% up to 55%. Now, the lower exemption and higher rates have been postponed until 2013.
Portability of Estate Exemption. Under the Act, if an individual dies in 2011 or 2012 and does not use his or her full $5 million exemption, the unused portion can be passed on to the individual’s surviving spouse if a federal estate tax return is filed making the election to do so. For example, if the decedent’s estate used $2 million of the decedent’s exemption, the remaining $3 million could be added to the surviving spouse’s exemption, giving a total of $8 million exemption available at the surviving spouse’s later death. Like the other provisions of the Act, unless Congress acts to extend it, this feature will expire on December 31, 2012.
GST Tax. The Generation Skipping Transfer (GST) tax is an additional tax on gifts and bequests to grandchildren and younger generations. For 2011 and 2012, the Act increases the exemption from GST tax to $5 million and reduces the rate to 35%.
Conclusion. While the federal estate and gift tax relief provided by the Act is substantial, unless Congress passes and the President signs new legislation to extend it, the benefits of the Act will expire at the end of next year. Thus, there may only be a limited opportunity to take advantage of the higher exemption levels. Those who have previously used their $1 million gift tax exemption now have an additional $4 million of exemption available to them. If you have any questions about how the Act may affect your estate plan, or how you can use the higher gift tax exemption to reduce your exposure to federal estate tax, please give us a call.