How the New 2010 Federal Tax Changes Impact Your Current Estate Plan
- September 30, 2016
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On December 17, 2010, President Obama signed the new tax law, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Tax Relief Act”) which settles important questions and concerns about the federal estate, gift and generation-skipping transfer (“GST”) taxes through December 31, 2012.
Under the federal laws that were effective until the end of 2009, there was a federal estate tax on estates up to $3.5 million per person and $7 million per couple with a maximum tax rate of 45%. According to the prior law, there was NO federal Estate Tax during the year 2010 and for the year 2011, there was only a $1 million exemption per person with the highest estate tax rate of 55%. With the passage of the Tax Relief Act, all of these old rules are replaced by the following federal estate, gift and GST tax provisions:
Estate Tax Changes
The most noteworthy change is the fact that the Estate Tax provisions that we all thought were zero for all of 2010 are now set aside and there IS a 2010 Federal Estate Tax. The bottom line is that the Tax Relief Act now in effect is retroactive to the beginning of 2010. Under the new law, beginning January 1, 2010, the Federal estate tax is back but with a larger exemption of $5 million per individual and $10 million per married couple for 2011 and 2012, and is indexed for inflation after 2011. Through December 31, 2012, the maximum tax rate for estates that exceed the exemption amount will decrease to 35%.
Notwithstanding the new rules, the executor/personal representative of estates of persons who passed away in 2010 before the enactment of the Tax Relief Act can make the following election: 1) have the federal estate tax (with a $5 million exemption and a 35 % maximum rate) and a stepped-up income tax basis apply to all estate assets or 2) have the federal estate tax not apply but the estate assets will have a carryover basis. These changes make a big difference and require a careful analysis to decide whether the estate should pay the tax and receive the stepped up basis or to forego the taxation but not get a partial step up in basis.
Historically, the due date for filing a Federal Estate Tax Return was 9 months after the date of death. Considering that the law was passed December 17, 2010, the deadline to file was extended by providing a revised due date which is 9 months after the date of enactment for (1) filing the estate tax return or any qualified disclaimer of estate assets and (2) making payment of estate taxes due.
Gift Tax Changes
The Federal Gift Tax Exemption for 2010 gifts remains at $1 million with the highest tax rate of 35%. Beginning in 2011, for gifts made in 2011 and 2012, the gift tax is reunified with the estate tax, meaning that an individual’s $5,000,000 exemption ($10,000,000 for a married couple) may be used for gifts during life or for assets passing upon death. Individuals who have already fully utilized the current $1,000,000 lifetime gift tax exemption will now have another $4,000,000 of exemption available. Lifetime gifts over $5,000,000 will be subject to tax at 35%.
Generation Skipping Transfer Tax Changes
For transfers made in 2010, 2011, the GST exemption is $5 million, indexed for inflation beginning in 2012. GST gifts above $5 million made in 2010 will not be subject to GST tax, but are subject to gift tax if the gift exceeds the $1 million gift tax exemption. GST gifts or transfers above $5 million in 2011 and 2012 are subject to the GST rate of 35%.
Temporary Changes Only
The Changes made by the Tax Relief Act are effective for only two years. Unless Congress passes additional legislation by the end of 2012, there will be a reinstatement in the year 2013 of the pre 2001 rates. There is no doubt that tax reform will be a major issue in the upcoming national elections and will be a hotbed of political debate.