January 10, 2011
Tax Reform Bill Affecting the Estate, Gift, and Generation-Skipping Transfer Tax (GST) for Transfers in 2010, 2011 and 2012
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Action of 2010 (H.R. 4853, 111th Cong., 2d Sess). This new tax reform bill makes substantial changes in the area of Estate, Gift and Generation-Skipping Transfer taxes (“GST” tax) for transfers occurring during the years 2010 through 2012. Some of the major changes include the following:
Estate Tax for 2010 Decedents
Prior to the new tax reform bill, there was no estate tax for decedents dying in 2010. The 2010 Tax Relief Act continues to preserve the 2010 estate tax repeal however the Personal Representative of the estate of a decedent dying in 2010 must choose between either of the following two options: 1) elect to be subject to the estate tax calculated at a 35% top rate, using a $5,000,000 estate exemption amount, and allow the beneficiaries of the estate to receive a step-up in basis (the fair market value of the assets on the date of death) on the estate assets distributed to them, or 2) affirmatively elect out of the estate tax and the beneficiaries of the estate will get a modified carryover basis instead of a step-up in basis on assets distributed to them.
2011 & 2012 Estate Tax Exemption & New Portability Rules
One of the most noteworthy changes under this Act is the unification of the gift, estate, and GST lifetime exemption amount which is currently $5,000,000 per person (or $10,000,000 for married couples) for the years 2011 and 2012. This exemption amount is significantly different compared to 2009 when it was only $3,500,000 and zero or $5,000,000 in 2010 but only if a proper election is made as mentioned in the preceding paragraph. Furthermore, for married couples, any exemption amount that remains unused as of the date of death of the first spouse to die during 2011 or 2012 will generally be available for use by the surviving spouse. However, under these new portability rules, in order for the surviving spouse to take advantage of any unused exemption amount, an election will need to be made on a timely filed estate tax return (including extensions) of the predeceased spouse, regardless of whether or not the deceased spouse’s estate has an estate tax return filing requirement.
Additionally, the top marginal estate, gift, and GST tax rate has been reduced from 55% to 35%.
2011 & 2012 Gift Tax Changes
Prior to the 2010 Tax Relief Act, the lifetime gift tax exemption for gifts made during 2010 was $1,000,000 and the gift tax rate was 35%. Under current law, any gifts made during 2011 or 2012, the gift tax is reunified with the estate tax and as such, the applicable lifetime exclusion amount is $5,000,000, with a top estate and gift tax rate of 35%.