Changes to Estate, Gift and GST Taxes through 2012
Under the recently enacted Tax Relief, Unemployment Insurance Reauthor-ization, and Job Creation Act of 2010 ("2010 Tax Relief Act"), the federal estate tax, which disappeared for 2010, springs back to life in 2011 with an exemption for the first $5 million of an estate's value, and a top rate of tax of 35% applicable to all amounts over $5 million. The following is a brief overview of the new law relating to estate, gift and generation-skipping transfer taxes.
Estate Tax Background. The modern federal estate tax dates back to 1916, when it was imposed at a tax rate of 10% on the portion of estates above $50,000. Over the following years, the tax rates and exemption amounts have varied, reaching a high of 77% from 1941 to 1976 with a $60,000 exemption amount.
In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), the first of the two large legislative packages that are now commonly referred to as the "Bush tax cuts." EGTRRA gradually lowered the maximum estate tax rate and substantially raised the amount of the estate that was excluded from federal estate tax over the years 2002 through 2009, and entirely eliminated the estate tax in 2010 (but with unfavorable "carryover basis" rules that result in increased capital gains tax).
However, all of those provisions were scheduled to sunset on December 31, 2010. If Congress had not acted by the end of 2010, starting January 1, 2011, the estate tax would have returned at a level where the exemption amount would have been $1 million ($2 million for couples) and the tax rate would have risen, from a top rate of 45% in 2009, to a top rate of 55% in 2011.
Estate Tax Changes. The 2010 Tax Relief Act reduces estate, gift and generation-skipping transfer (GST) taxes for calendar years 2011 and 2012 beyond those seen in 2009. It preserves the federal estate tax repeal for the calendar year 2010 for those estates that elect to pay no estate tax under the old 2010 rules (but those estates that elect to pay no estate tax are subject to unfavorable carryover-basis rules for capital gains tax). Otherwise, by default, there is a $5 million exemption for unmarried persons and, with proper planning, a $10 million combined exemption for married couples for 2011 and 2012. The new federal estate tax rate for estates larger than the exemption amounts is 35%. The 2010 Tax Relief Act also reinstates the principle of "stepped-up basis" for inherited assets, eliminating accrued or built-in capital gains and reducing future capital gains tax for some heirs.
The 2010 Tax Relief Act also contains a new portability rule between spouses that allows the shifting of any of the deceased spouse's unused exemption amount (it's portable) to his or her surviving spouse. Thus, for the first time in history, and provided the estate is properly planned and administered, this provision would allow the deceased spouse to leave more of his or her property to the surviving spouse directly. However, this provision may not be useful for many married couples who want their property distributed in a particular manner (for example, within the family line). We would be happy to discuss with you the particular costs and benefits of exemption portability.
Gift Tax Changes. Several years ago, the gift tax and estate tax rules were unified and shared a single exemption and the same tax rates. This was not the case in recent years. For example, in 2010, the top gift tax rate was 35% and the exemption was $1 million. For gifts made after December 31, 2010, the gift tax will be reunified with the estate tax, meaning that the $5 million estate tax exemption ($10 million for couples) will be available for gifts. Gifts in excess of the exemption amounts are taxed at a rate of 35%. We continue to advise our clients to take advantage of the $13,000 per person annual exclusion for gifts every year, which will remain at the same level through 2011.
GST Tax Changes. The generation-skipping transfer (GST) tax is an additional tax on gifts and bequests to grandchildren when their parents are still alive. The 2010 Tax Relief Act lowers the GST tax for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million ($10 million for couples) and reducing the rate from 55% to 35%.
Conclusion. The estate, gift and GST tax relief in the 2010 Tax Relief Act is substantial, but it is temporary. Estate planning to reduce taxes remains an important consideration. Even if taxes are not a concern because an estate is below the exemption levels, it is important to have a proper estate plan to ensure that the needs of a surviving spouse and other intended beneficiaries are met.
We would be pleased to meet with you at a scheduled appointment to discuss how you and your family can make the best use of the 2010 Tax Relief Act in your overall estate plan.
Circular 230 Disclosure. To assure compliance with Treasury Department rules governing tax practice, we inform you that any advice (including in any attachment) (1) was not written and is not intended to be used, and cannot be used, for the purpose of avoiding any federal tax penalty that may be imposed on the taxpayer, and (2) may not be used in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.
The Estate and Gift Planning Specialists:
Bob Buchman, Partner
Wes Smith, Partner
Tom Blomberg, Partner
Jenifer Leece, Partner