On December 17, 2010, the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” was signed into law by President Obama. The new law contains an extension for two years of many of the Bush-era tax cuts. It also makes significant changes to the gift, estate and generation-skipping transfer (GST) tax laws. The law provides new estate planning opportunities, including some that are only available until the end of 2010.
Some of the key provisions of the bill are:
Federal Estate and Gift Tax Rate. The federal gift and estate tax rate in 2011 and 2012 will be 35% (the lowest rate since 1931).
Exemption Amounts. The aggregate federal gift and estate tax exemption in effect on January 1, 2011 is unified at $5 million per person. The entire $5 million exemption may be used during life. Additionally, the generation-skipping transfer tax exemption is increased to $5 million, effective for transfers subsequent to December 31, 2009.
Stepped-up Basis. The carry-over basis rules currently in effect for distributions from the estate of an individual who died in 2010 are repealed. Beneficiaries of the estate of a 2010 decedent will receive property with stepped-up basis to date of death value, unless the estate chooses to apply the carry-over basis, no estate tax regime.
Election for 2010 estates. The new law allows the estate of a 2010 decedent the choice to use the current 2010 rules (no estate tax and carryover basis) or the new rules ($5 million exemption and stepped-up basis). In addition, for estates of decedents who died between January 1, 2010 and December 18, 2010, there are 9 months from December 18th:
a. to file and pay estate taxes, or to elect to pay no estate tax;
b. to make qualified disclaimers; however, this may require additional conforming amendments since a requirement of a qualified disclaimer is that the disclaimer is valid under state law.
Portability of Exemption. Beginning in 2011, spouses will be able to claim the unused portion of their last deceased spouse’s $5 million exemption. If a decedent had multiple spouses, only the most recent spouse’s exemption may be used. There is no portability of the GST exemption between spouses.
GRATs and FLPs. The bill does not provide for limits on grantor retained annuity trusts (GRATs) or on the discounted valuation of family limited partnerships (FLPs) or LLCs.
Areas for further attention:
GST Planning Opportunities. For 2010 there is zero tax on GST transfers. This allows opportunities to make transfers before year-end to lower generations (outright or in trust) and pay no GST tax. There is a $5 million GST exemption available to allocate to lifetime and testamentary transfers, retroactive to January 1, 2010. However, the gift tax exemption for 2010 remains $1 million.
Formula Clauses. The increased exemption amount could have unexpected consequences in some estate plans. Formula clauses should be reviewed to ensure the increased exemption amount is consistent with client wishes.
2010 Estates. Careful attention should be paid to the available election for 2010 estates.
Annual Gift Tax Exclusion. There are no changes to the annual gift tax exclusion, which is currently $13,000, indexed for inflation. However, there is a small inflation adjustment for annual exclusion gifts to a non-citizen spouse, rising from $134,000 to $136,000 in 2011.