Summary of 2010 Tax Changes

By:  Sandra L. Clapp, Esq.

As we approach the end of 2010, important legislation was recently adopted that may impact your tax planning. Because we strive to keep you apprised of significant changes in the law, I am writing to provide you with a brief overview of the main provisions of the new law. On December 17, 2010, President Obama signed into law the “Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010.” Under this new law, some of the changes include the following:

• The new law will be in effect until 2012. The hope remains that congress and the president will adopt a longer solution to the estate and gift tax structure.
  
  
• 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 can have the opportunity to transfer up to $10,000,000 without estate tax.
  
  
• The new law allows the surviving spouse to benefit from any unused exemption for the first spouse to die (known as “portability”). 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. 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. However, 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.
  
  
• Upon death of the first spouse, the executor must timely file an estate tax return and make an election for the surviving spouse to be able to use the unused exemption of the deceased spouse.
  
  
• For decedent’s dying in 2010, the estate executor can elect out of the estate tax and choose to use the carryover basis rules that have been in effect prior to adoption of the new law.
  
  
• For decedent’s dying in 2010, the executor is granted an extension of time to file the estate tax return or generation skipping transfer tax return and pay estate taxes no earlier than nine (9) months after the date of enactment.
  
  
• If the executor elects out of the estate tax structure, the carryover basis report will be due no earlier than nine (9) months after the date of enactment. However, a longer filing period could also be accomplished through extension of the decedent’s final income tax return as the carryover basis report must be filed with the decedent’s final income tax return.
  
  
• 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.
  
  
• For 2010, the lifetime gift tax exemption will remain at $1,000,000.
  
  
• For gifts made in 2010, there is no generation skipping transfer tax to gifts to skip persons.
  
  
• In 2011, the generation skipping transfer exemption will increase to $5,000,000.
  
  
• Gifts to “skip persons” (such as grandchildren or lower generations) that are made before December 31, 2010, will not be subject to the generation skipping transfer tax and this opportunity will end shortly. These gifts in 2010 will, however, remain subject to the $1,000,000 lifetime gift tax exemption.
  
  
• Beginning on January 1, 2011, the top gift and estate tax rate will be 35%.
  
  
• The 15% capital gain and dividend rate was retained.
  
  
• The bill also raised the amount of income that is exempt from the alternative minimum tax. For tax year 2010, the AMT threshold will be $47,450 for individuals and $72,450 for couples filing jointly. In 2011, the AMT threshold will increase to $48,450 for individuals and $74,450 for couples.

The 2010 tax changes have brought some level of certainty to estate, gift and tax planning at least for the next two years. Based upon these changes, it is recommended that most larger gifts above the annual exclusion be postponed until 2011 when the higher $5,000,000 gift tax exemption will apply. The exception may be gifts to grandchildren or other lower generations made before December 31, 2010, because there will be no GST tax on these transfers. In addition, any estate planning documents that incorporate trusts or distributions based upon tax planning (such as a bypass trust) should be reviewed as such trusts or distributions may be unnecessary for the next few years.

This summary is not intended to replace legal or tax advice geared to your individual situation. Please consult with your attorney or tax advisor before taking any course of action that may have tax effect. While we strive to accurately summarize relevant provisions of the new law, no guarantee is made about the accuracy of the information provided herein.