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The New Estate & Gift Tax Law

In December, 2010, Congress passed the New Estate/Gift Tax Law which was made retroactive to January 1, 2010, effective through 2011 and 2012. Without some congressional action prior to January 1, 2013, the estate/gift tax will revert to the pre-2002 rates.

The new law sets the new estate tax exemption at $5 million dollars ($10 million dollars per married couples) with a tax rate of 35%. Beginning in 2012, the exemption amount is indexed for inflation.

While the new estate tax law applies retroactively for decedent’s dying in 2010, the law does allow estates for decedents dying in 2010 to affirmatively elect out of the new estate tax law. Of course, prior to the new estate tax law there was no estate tax for decedent’s dying in the year 2010. However, prior to the year 2010 and now subsequent to the year 2010, all heirs would receive a full stepped up basis for the property they inherit. For estates of decedents dying in 2010, if the estate elects out of the new estate tax law, there is no estate tax but the estate falls under the modified carryover basis rules. With some important exceptions, the heirs receive a basis in the inherited property equal to the decedent’s basis in the property. This results in no increase in basis for depreciation purposes and a possible capital gains tax on the eventual sale of the property. Obviously, the decision is complex and careful tax considerations need to be given for these elections for decedent’s dying in the year 2010.

The new estate tax law introduces a new feature impacting the exemption amount for married couples, called “Portability.” This means that if the first spouse to die does not use up all of his or her $5 million dollar exemption amount, the remaining exemption amount carries over to the surviving spouse and can be used by the surviving spouse in addition to the surviving spouse’s $5 million dollar exemption amount. The important thing to remember is that in order to use the new portability rule, the estate of the deceased spouse must make an election on a timely filed estate tax return and this return must be filed even if no return would otherwise be required to be filed. Under the 2010 Act portability does not apply to decedents dying in 2010.

Under the new law, the gift and estate tax have been reunified in 2011 and 2012. This means that there is the same $5 million dollar exemption amount for lifetime gifts and bequests at death. Exceeding the $5million dollar gift tax exemption will subject the excess to a tax at a rate of 35%. The annual exclusion amount remains unchanged at $13,000.00 per year and will continue to be adjusted annually for inflation. Of course, the exclusion for direct payments of tuition and medical expenses continues to apply.

The generating skipping transfer tax has a $5 million dollar exemption under the 2010 act. The GST tax was designed to prevent families from transferring property that skips a generation, such as transfers from a grandparent to a grandchild, as a way to escape one level of estate tax. While each spouse has a separate $5 million dollar GST exemption, there is no portability for the GST exemption amount.

The 2010 estate/gift tax law changes have opened up major estate tax planning opportunities, but since the legislation is set to sunset in 2013, prompt action may be necessary to achieve the maximum benefit.