Type: Law Bulletins
Date: 12/20/2010

New Tax Legislation Makes Major Changes to Estate, Gift and GST Tax Laws

Alert: Anyone interested in making substantial gifts to grandchildren free of generation-skipping transfer tax has a narrow window of opportunity that closes on December 31, 2010.

On Friday, December 17, 2010, the President signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”). In addition to temporarily extending certain Bush-era income tax cuts, the Act makes a number of significant (albeit temporary) changes to the estate, gift and generation-skipping transfer tax laws.

Estate Tax

  • Exemption Amount and Rate.  Prior to enactment of the Act, the estate tax had been repealed for 2010 but was scheduled to be automatically reinstated on January 1, 2011 with a $1 million exemption amount and a maximum tax rate of 55%. The Act reinstates the estate tax for 2010 with a $5 million exemption amount and a 35% tax rate. The Act provides that the $5 million exemption amount and 35% tax rate will continue for 2011 and 2012 (subject to inflation adjustments to the exemption amount in 2012). Unless Congress takes further action, the exemption amount and rate will revert to $1 million and 55%, respectively, in 2013.
  • Spousal Portability of Exemption.  Beginning in 2011, a decedent’s estate may elect to transfer the decedent’s unused exemption amount, if any, to his or her surviving spouse. Unless Congress takes further action, however, this feature will only be available in cases where both spouses die in either 2011 or 2012.
  • Opt-Out for 2010 Estates.  Under the Act, estates of decedents who die in 2010 may “opt-out” of the estate tax, in which case the decedent’s estate will be subject to the modified carry-over basis rules that were previously in effect for all estates in 2010. Under those rules, a decedent’s estate may allocate $1.3 million of stepped-up basis to the decedent’s property (plus an additional $3 million of stepped-up basis to the decedent’s property that passes to the decedent’s spouse). Any remaining property would then have a carry-over basis. This option may be especially attractive in cases where a decedent’s gross estate exceeds $5 million and the decedent had a relatively high income tax basis in his or her property. Estates that opt-out of the estate tax for 2010 will be required to file a new form, “Allocation of Increase in Basis for Property Received from a Decedent” (Form 8939), with the IRS in order to allocate a step-up in basis to the decedent’s property.

Gift Tax

The Act does not change the gift tax exemption amount ($1 million) or the gift tax rate (35%) for 2010. However, beginning in 2011, the Act increases the gift tax exemption amount to $5 million (with inflation adjustments beginning in 2012) and keeps the gift tax rate at 35%. Prior to enactment of the Act, the gift tax exemption had been scheduled to remain at $1 million and the gift tax rate had been scheduled to increase to 55% for 2011. Unless Congress takes further action, the exemption amount and rate will revert to $1 million and 55%, respectively, in 2013.

Generation-Skipping Transfer Tax

Like the estate tax, the generation-skipping transfer (“GST”) tax had been repealed for 2010 but was scheduled to be automatically reinstated on January 1, 2011 with an exemption amount of approximately $1 million and a maximum tax rate of 55%. The Act reinstates the GST tax for 2010 but provides for a GST tax exemption amount of $5 million and a GST tax rate of 0% for 2010. The Act provides that the $5 million exemption amount will continue for 2011 and 2012 (subject to inflation adjustments to the exemption amount in 2012), and the GST tax rate will be 35% for 2011 and 2012. Unless Congress takes further action, the exemption amount and rate will revert to approximately $1 million and 55%, respectively, in 2013.

Attorneys in Taft’s Private Client group are available to discuss the Act and its impact on our clients and friends. We encourage you to contact us with any questions. In the meantime, we hope your holidays are happy and safe, and we look forward to working with you in the new year.
 

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