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By:  Sandra L. Clapp, Esq.

As we approached the end of 2010, many favorable tax laws were scheduled to expire and tremendous uncertainty existed regarding the tax laws that would come into effect in 2011.  On December 17, 2010, President Obama signed into law the “Tax Relief . . Act of 2010” (the “2010 Tax Act”).  The new law established some temporary certainty in the income, estate and gift tax laws in particular.  As we explored in an earlier issue of The Eagle Informer, in 2010 the federal estate tax was “repealed” only for 2010.  Without the adoption of further laws, commencing in 2011 the estate tax exemption for each individual would have been reduced to $1,000,000, which was the amount in effect in 2001.

The new estate and gift tax laws adopted in the 2010 Tax Act will only be in effect through 2012 and we will once again face an unknown future without further action of congress.  Unless new laws are adopted to continue or modify the provisions of the 2010 Tax Act, commencing in 2013 the estate and gift tax exemption will again return to the $1,000,000 amount.  Because the 2010 Tax Act does not create permanent change, unfortunately we are not able to solely rely upon these provisions and it remains important in the planning process to consider the possibility that the laws are not continued past 2012.  Although the 2010 Tax Act also impacted income tax laws, this article will focus on the estate and gift tax changes.

The 2010 Tax Act contained favorable provisions which include the following:

  1. Increased Estate Tax Exemption.  Each individual will have a $5,000,000 exemption from federal estate taxes beginning retroactive to January 1, 2010.  This will mean a married couple will have the opportunity to transfer up to $10,000,000 without estate tax.

  2. Portability of Exemption.  The 2010 Tax Act introduced a new concept known as “portability.”  The new law allows the surviving spouse to benefit from any unused exemption for the first spouse to die.  Upon death of the second person, the estate of the spouse will receive the benefit of the $5,000,000 exclusion (or the amount then in effect), plus the deceased spouse’s unused exclusion amount.  To utilize the portability of the exemption, the surviving spouse will be required to timely file a federal estate tax return. This change alone may have significant impact on any estate documents that utilize a “bypass” trust that is tied to the federal estate tax exemption.  While there may be non-tax reasons to establish an irrevocable trust upon death of the first spouse, the portability of the exemption provides greater planning flexibility.  The portability provision will also sunset in two years so estate planning will still need to consider a death occurring where portability no longer is the law.

  3. Death in 2010.  For individual who died in 2010, the estate will have two options – (a) to file an estate tax return under the 2010 Tax Act and utilize the increased $5,000,000 exemption, or (b) elect out of the estate tax laws and choose to use the carryover basis rules that were in effect under the estate tax “repeal” that had been the law through most of 2010.

  4. Increased Gift Tax Exemption.  Beginning on January 1, 2011 through December 31, 2012, each individual can make taxable gifts during lifetime of up to $5,000,000 without paying gift tax.  The amount will be indexed for inflation beginning in 2012.  This change truly unified the estate tax and gift tax exemption.  The annual gift tax exclusion has remained at $13,000 per individual gift recipient.

  5. Generation Skipping Transfer Tax.  For transfers made to “skip” persons, generally grandchildren or lower generation heirs, a separate tax known as the generation skipping transfer tax or “GST” will apply.  The general purpose of the GST is to minimize the amount that can be transferred to lower generations and “skip” being subject to estate tax at each level of inheritance.  In 2010 there was no GST in effect under the “repeal.”  Under the 2010 Tax Act, the generation skipping transfer exemption was increased to $5,000,000.

Based upon the 2010 Tax Act, it would be prudent to review the provisions of your estate planning documents, particularly if the documents incorporate any tax planning formulas or trusts.  Although the 2010 Tax Act is a temporary solution, hope remains that the favorable new provisions will be carried forward in any future tax acts. This article is not intended to replace legal advice applicable to your situation and should be used only for informational purposes.  Because of the complexity of the laws, please consult with your attorney for proper guidance.

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