Today, President Obama signed the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" (the "Tax Relief Act"), to extend for 2 years certain expiring tax provisions. The Tax Relief Act adopts the compromise President Obama announced last week, which the U.S. Senate and House passed during the last 2 days. The Tax Relief Act changes the federal estate, gift and generation-skipping transfer ("GST") tax as follows:
Estate Tax. For deaths occurring from 2010 through 2012, federal estate tax will be imposed at a 35% maximum rate on estates with assets over $5 million (assuming no gift tax exemption has been used). To avoid any penalty from the retroactive change in existing law, the executor of any person who died during 2010 can elect not to pay the estate tax and instead carry over the deceased's income tax basis on bequests (subject to certain adjustments). Beginning in 2011, a surviving spouse may reduce his or her estate tax by the unused estate tax exemption of his or her deceased spouse (who died during 2011 or 2012).
Gift Tax. Federal gift tax will be imposed on taxable gifts made from 2010 through 2012 at a 35% maximum tax rate. The lifetime gift tax exemption will remain limited to $1 million for 2010, but will increase to $5 million for 2011 and 2012.
GST Tax. Transfers that skip a generation during 2010 will continue to benefit from a 0% GST tax rate, which will increase to 35% for transfers during 2011 and 2012. A $5 million GST exemption will be available to allocate against GST taxes from 2010 to 2012.
On January 1, 2013, the Tax Relief Act will return the federal estate, gift and GST tax rates to pre-2001 laws which include increased tax rates of up to 55% and decreased exemption amounts of $1 million, adjusted for inflation.
2010 Estate Planning Opportunities
While the Tax Relief Act extends (and enhances) several estate planning strategies into 2011, the following estate planning opportunities will remain only through the end of 2010:
- Lifetime Gifts to Grandchildren. During 2010, grandparents may make gifts to their grandchildren outright or in trust without paying GST tax or using their GST exemption. A grandparent who desires to transfer more than $5 million to grandchildren may make gifts to grandchildren before December 31, 2010, pay the 35% gift tax and avoid GST tax until assets pass to great-grandchildren (or more remote descendants).
- Distributions from GST Non-Exempt Trusts. For existing trusts which are not exempt from GST tax (a "GST Non-Exempt Trust"), a Trustee may distribute (or be directed to distribute by a trust beneficiary with a limited power of appointment) trust assets to another generation in trust without GST or gift tax during 2010. Such distributions may avoid further GST tax until assets pass to the following generation. If made during 2011, those distributions are subject to GST tax.
The Tax Relief Act did not include proposals to restrict Grantor Retained Annuity Trusts by requiring a 10-year minimum term or change the valuation of interests in family-controlled businesses and other entities.