New Tax Laws
President Barack Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 into law on Friday, December 17, 2010. This law makes important changes that may affect your general trust, estate and gift planning for the balance of this year and for the next two years. Important provisions of the law are described below. Please contact us if you wish to take advantage of opportunities before year end, or if you wish to review your estate plan in light of the new law.
The salient points of the new law are:
- The estate tax, which had disappeared in 2010, has been reinstated retroactively to January 1, 2010. The exemption amount is increased to $5,000,000 and the top rate of tax (on amounts in excess of $500,000) is 35%. There is an opportunity to elect not to have this law apply to the estates of decedents who died in 2010, but rather to have the existing law — which provides for no estate tax but a continuation of the tax cost basis of assets transferred in the estate (“carryover basis”) — apply.
- The top gift tax rate remains at 35% for 2011 and 2012. Beginning January 1, 2011 it is unified with the estate tax and has a $5,000,000 applicable lifetime exemption amount, up from the current exemption of $1,000,000.
- The generation-skipping transfer (“GST”) tax is reinstated retroactively to January 1, 2010, but the tax rate for taxable transactions in 2010 is zero. Beginning in 2010, the exemption amount will be $5,000,000, linked to the estate and gift tax exemption amounts, and the tax rate beginning in 2011 will be 35%.
- The exemption amount will be indexed against inflation from 2010, beginning in January of 2012.
- The exemption amount will become “portable.” That is, to the extent the estate of the first spouse to die does not use the full $5,000,000 exemption amount, the unused portion may be used by the surviving spouse as an addition to her or his own exemption amount.
- For estates of individuals who die in 2010, the federal estate tax return will not be due until August 17, 2011 (or 9 months after death, if the individual dies in the next two weeks.)
What does this mean to you?
- Gifts to grandchildren or more remote descendants, outright or in trust, and distributions to such persons from existing trusts that are subject to the generation-skipping transfer tax, can be made in the last two weeks of 2010 without any GST tax being payable. Of course, gifts this year will be subject to gift tax, at a 35% rate and with a $1 million exemption.
- Other gifts can be made at any time (through December 31, 2012) at the 35% gift tax rate. Because of the increased exemption amount, these gifts might best be made in 2011 or 2012, rather than in 2010. The $5,000,000 exemption amount can present planning opportunities.
- Estate plans should be reviewed, in light of the significantly increased exemption amount and GST exemption.
- Fiduciaries of estates of persons dying in 2010, that are entirely or largely exempt from federal estate tax because of the new $5,000,000 exemption, may wish to file returns and be covered by the estate tax, in order to step-up the tax basis of assets. Making this determination will require an analysis of the assets held in the estate, and the federal and state estate and income tax effects.
We look forward to hearing from you and to working with you to take maximum advantage of the planning opportunities presented by the new law.
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