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New Tax Law For Estates and Gifts, In a Nutshell
Posted in Estate Planning

Note: This is an update to an earlier post available here >> In December, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The Act includes significant changes to the federal gift tax, estate tax and generation skipping tax discussed below. Be aware that the Act’s provisions are temporary, and apply only during 2011 and 2012. Significant tax changes created by the Act

  • The maximum exemption level (i.e., the maximum amount a person may give away without incurring tax) is $5 million, indexed annually for inflation,for the following taxes:
    • Estate tax,
    • Gift tax,
    • GST Tax.
  • The Gift and Estate Tax Exemption are re-unified, so now $5 million (indexed), up from $1 million, may be given away during life gift tax free.
  • The maximum tax rates for Estate, Gift and GST taxes will be 35 percent.
  • The Act revives the long-standing rule that the income tax basis for property acquired at death receives a basis equal to the fair market value as of the date of death (commonly known as “stepped up basis.”)  
  • For estates of decedents who died in 2010, such estates may choose to have the  new estate tax rules apply ($5 million exemption,  35 percent rate, and  stepped up basis), or have no estate tax and use the modified basis under the 2010 rules in existence prior to passage of the Act.
  • Portability of the Gift and Estate Tax Exemption:
    • The amount of the unused exemption will be added to surviving spouse’s exemption at surviving spouse’s death.
    • If the surviving spouse is predeceased by more than one spouse, the carry-over exemption will be the lesser of $5 million or the unused exemption of the last such predeceased spouse.
    • The unused exemption will be available to a surviving spouse only if election is made on a timely filed (including extensions) estate tax return for estate of first spouse to die.

As of January 1, 2013, the Act “sunsets” and exemption levels reduce to $1 million for gift, estate and generation-skipping transfer tax purposes, with a maximum transfer tax rate of 55 percent applying above such exemption levels.  A change made by the Act which is not scheduled to expire as of December 31, 2012, is the reinstatement of the “step-up” in basis rule. Review estate plans, seize planning opportunities It is important that estate plans be reviewed  in light of the significant changes made by the Act.  The increased exemptions available under the Act provide significant planning opportunities, but such opportunities may only be temporary.  It may be advisable to engage in planning that results in the gift and/or generation-skipping transfer tax exemptions being utilized now (prior to January 1, 2013), because, under the Act, the increased exemption levels will not be available for transfers made on or after January 1, 2013 (transfers made by gift or death).  It may even be advisable, in certain situations, to make taxable gifts that incur gift tax at  a 35 percent rate, rather than such assets being held until death and then taxed at their appreciated values at possibly a 55 percent rate or higher.             

If you have questions about how the Act may impact you, please contact the Estate Planning Practice Group at Bingham Greenebaum Doll.

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