Temporary Estate Tax Reform – Congress Passes the 2010 Tax Relief Act

Written by: Elise H. Salek, Leader of Sulloway's Business and Private Clients Group

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, otherwise knows as the 2010 Tax Relief Act.. This Act contains a number of provisions that impact estate, gift and generation-skipping taxes in 2011 and 2012. Unfortunately, the 2010 Tax Relief Act provides no certainty with respect to exemption amounts or tax rates beyond 2012 since its provisions are set to expire on December 31, 2012. We will therefore need to await the outcome of the 2012 elections to determine whether the new changes will remain in place beyond 2012. However, for the next two years, the following rates and exemptions will apply:

New $5 million estate tax exemption. Individuals dying in 2011 and 2012 can now count on a $5 million per person estate tax exemption; anyone with a taxable estate in excess of $5 million will be subject to a 35% tax on amounts in excess of the exemption amount.

New 35% gift tax rate; gift tax reunified with estate tax. Individuals are currently allowed a gift tax exemption of $13,000 per person each year. Any gifts in excess of this $13,000 per year exemption are now subject to gift tax at a flat rate of 35%. This is a marked improvement over the phase outs and the 55% rate that would have applied under prior law. In addition, as of January 1, 2011, the gift tax has been reunified with the estate tax. Individuals are therefore no longer limited to a lifetime gift tax exclusion of $1 million and can therefore (during 2011 and 2012) make lifetime gifts of up to $5 million.

Portability of estate tax exemption. For 2011 and 2012, a deceased spouse's unused estate tax exemption can be used to offset estate taxes in the surviving spouse's estate. Under prior law, spouses with potentially taxable estates had to plan carefully to make sure that they each retained sufficient assets to fully use their estate tax exemption (now $5 million). Under the 2010 Tax Relief Act, a spouse who dies without having used his or her $5 million exemption can pass any unused portion of that exemption to his or her surviving spouse.

Increase in generation-skipping exemption amount. For 2011 and 2012, the generation-skipping transfer tax exemption (previously limited to qualified transfers in excess of $1 million (indexed for inflation)) has been increased to $5 million. This $5 million exemption will be indexed for inflation after 2011, but given that the new Tax Relief Act's provisions are all scheduled to sunset in 2012, it is doubtful that any indexing will actually apply.