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March/April 2012
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January 25, 2011
Articles
2010 Tax Relief Act and Your Estate Plan
Short-term answers, long-term questions
After years of uncertainty, Congress has finally determined the fate of the estate tax — temporarily. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed into law on Dec. 17. The act provides lower tax rates, higher exemptions and more flexibility — but only through 2012.
A brief history
The 2001 tax act gradually reduced estate, generationskipping transfer (GST) and gift tax rates and increased exemption amounts over several years. In 2009, the top rate was 45%, the exemptions for GST and estate taxes were $3.5 million, and the gift tax exemption was $1 million.
In 2010, the act’s GST and estate tax one-year repeal went into effect, and the top gift tax rate dropped to 35%. The $1 million gift tax exemption was unchanged. Also in 2010, the stepped-up basis rules were replaced with modified carryover basis rules.
Under a stepped-up basis regime, the tax basis of inherited property generally is increased to its date-of-death fair market value. This allows heirs to sell the property immediately without triggering capital gains tax. But under the 2001 tax act’s modified carryover basis regime, the estates of people who died in 2010 were permitted to allocate only up to $1.3 million to increase the basis of certain assets, with an additional $3 million for assets left to a surviving spouse. Other assets received a carryover basis — generally equal to the deceased’s basis — which could result in significant capital gains tax liability when the assets are sold.
If the 2010 Tax Relief act hadn’t been signed into law, then in 2011 the estate, GST and gift taxes would have returned to their pre-2001 tax law levels — that is, a top tax rate of 55%, a $1 million combined exemption for gift and estate taxes, and a $1 million (indexed for inflation) GST tax exemption. Current state of the estate tax
Under the 2010 Tax Relief act:
- The estate tax is revived for 2010. For 2010 through 2012, the top rate is 35% and the exemption is $5 million.
- The gift tax also applies at a top rate of 35%, but the exemption is $1 million for gifts made in 2010. For gifts made in 2011 and 2012, the gift and estate tax exemptions are reunified in a combined $5 million exemption.
- The GST tax also is reinstated for 2010, also with a $5 million exemption through 2012. But the GST tax rate is 0% for 2010, increasing to a rate of 35% for transfers made in 2011 and 2012.
- The stepped-up basis rules are restored, retroactive to the beginning of 2010.
- For 2011 and 2012, the estate tax exemption is “portable” between spouses. (See “The portable exemption” below.)
The $5 million exemption will be adjusted for inflation for 2012. Some observers interpret this provision to mean that lawmakers foresee an extension of the act’s estate tax provisions beyond 2012.
Two options for 2010
For people who died in 2010, the Tax Relief act allows their estates to elect not to apply the new law. In other words, instead of applying the act’s 35% estate tax rate, $5 million exemption and stepped-up basis rules, an estate may opt to avoid estate tax altogether and apply the modified carryover basis rules to assets acquired from the estate. Choosing the best option boils down to economics — determining which strategy will likely result in lower combined income and estate tax liability. This will depend on the value of the estate’s assets, how much they appreciated while the deceased held them and whether those who receive the assets plan to sell or hold them.
Revisit your plan
The Tax Relief act provides short-term answers to many of the questions surrounding the estate tax during the last several years. But long-term questions remain: Will higher exemptions and lower rates be extended beyond 2012? What about the new portability of the estate tax exemption? How will this ongoing uncertainty affect your estate plan? Talk with your estate planning advisor about whether any changes to your estate plan may be warranted.
| The portable exemption |
One of the more interesting estate-tax-related provisions of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 is making the $5 million estate tax exemption “portable” for 2011 and 2012. In other words, if one spouse dies without using all of his or her exemption, the surviving spouse can add the unused portion to his or her own exemption and use it to make taxfree transfers during life or at death. Portability can simplify estate planning, essentially allowing a married couple to maximize the benefits of both spouses’ exemptions without complex trust arrangements. To qualify, an election must be made on a timely filed estate tax return for the first spouse to die. Special rules apply to surviving spouses who are predeceased by more than one spouse. Note that a spouse’s generation-skipping transfer tax exemption is not portable, which can complicate things if your estate plan includes bequests to grandchildren. Also, uncertainty over the fate of estate tax exemption portability after 2012 limits its ability to simplify estate plans. |
Contact one of our Estate Planning attorneys for more information:
 Barbara M. Kristiansson (651) 312-6041 bkristiansson@felhaber.com |
 Nicholas J. Kaster (651) 312-6037 nkaster@felhaber.com |
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Felhaber, Larson, Fenlon & Vogt, P.A. |
Felhaber, Larson, Fenlon & Vogt, P.A. |
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