The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312, (the “2010 Act”) was signed into law on December 17, 2010. The following summarizes the significant changes to the federal gift, estate and generation-skipping transfer (“GST”) tax laws brought about by the 2010 Act for 2011 and 2012.
Gift Tax in 2011 and 2012. The maximum gift tax rate in 2011 and 2012 continues to be 35%. However, each individual now has a $5 million lifetime gift tax exclusion amount for those two years, allowing transfers of up to $5 million ($10 million for a married couple) to be made free of any federal gift tax. The 2010 lifetime gift tax exclusion amount was $1 million. The annual gift tax exclusion amount for gifts up to $13,000 to any individual remains unchanged.
Reunification of Gift and Estate Tax Exclusion Amounts. The 2010 Act reunifies the gift and estate tax exclusion amounts. To the extent the exclusion amount is not used for gifts it can be applied to bequests at death. The $5 million exclusion amount will be adjusted for inflation beginning in 2012.
Estate and GST Tax in 2011 and 2012. The 2010 Act imposes a maximum estate tax rate of 35% and an exclusion amount of $5 million per individual whose death occurs in 2011 or 2012. The GST tax exemption amount is equal to the estate tax exclusion amount ($5 million) and the GST tax rate is equal to the maximum estate and gift tax rate (35%).
Portability of Unused Estate Tax Exclusion Amount. If a married person dies in 2011 or 2012 without using all of his or her $5 million estate tax exclusion amount, the unused portion can now be utilized by the surviving spouse as an addition to the survivor’s own exclusion amount. The executor of the estate of the deceased spouse must irrevocably elect on a timely filed estate tax return (even if a return is not required to be filed because the gross estate is below $5 million) that this unused portion be made available to the surviving spouse. If a surviving spouse is predeceased by more than one spouse, the survivor may only utilize the unused portion of his or her last spouse’s exclusion amount, up to $5 million.
A decedent’s GST tax exclusion amount is not portable, so that a surviving spouse can not use the unused GST tax exclusion amount of a deceased spouse.
Income Tax Basis in 2011 and 2012. The tax basis of property owned by an individual whose death occurs in 2011 and 2012 will be automatically “stepped-up” for income tax purposes to its fair market value as of the individual’s date of death (or the alternate valuation date if that is applicable).
2013 and Beyond. The 2010 Act gives taxpayers some certainty in tax planning for the next two years. Congress will need to address transfer taxes prior to December 31, 2012 to avoid a return to 2001 levels, which would result in reduced gift tax and estate tax exclusion amounts (a total of $1 million), a reduced GST tax exclusion amount (approximately $1.35 million) and higher maximum tax rates (55%).
The increased gift tax exemption presents some significant opportunities to make gifts in 2011 and 2012. Moreover, the increased estate tax and generation-skipping transfer tax exemptions could have unanticipated consequences under estate plans which have not been reviewed recently. Please contact us to if you would like to review any planning opportunities or how your estate plan might be affected by these developments.