Estate Tax Law Change: New Opportunities; New Uncertainties
Submitted By: Schneider, Smeltz, Ranney & LaFond, LLP
As you have probably heard, President Obama recently signed into law a tax bill designed to extend the so-called “Bush tax cuts” for two years—through 2011 and 2012. Included in the bill were significant, though temporary, changes to the federal estate tax laws. Some key changes include:
- Transfer Tax Exemptions Increased: In 2011 and 2012, the federal estate, gift, and generation-skipping transfer (“GST”) tax exemptions will be "unified" at $5 million. The change to the gift tax exemption is particularly significant, because the gift tax exemption has never been higher than $1 million previously. This change creates opportunities for significant lifetime gifts during the next two years.
- Transfer Tax Rates Decreased: In 2011 and 2012, the federal estate, gift, and GST tax rates will be 35% on any transfers above an individual’s exemption amount (summarized above). Without this newest legislation, the tax rate on all three taxes for 2011 would have returned to 55%.
- Clarification for Deaths in 2010: For most of 2010, there has been no federal estate tax, but the rules for capital gain tax treatment of inherited assets have been less favorable to heirs under a "carryover basis" system. Under the new Act, estates of persons dying in 2010 will be subject to federal estate tax with a $5 million exemption and a 35% estate tax rate, unless the estate elects to be treated under the existing "carryover basis" system. Also in 2010, the GST tax features a $5 million exemption and 0% tax rate, and the gift tax has a $1 million exemption and 35% tax rate.
- Estate Tax Exemption Portability: “Portability” is a new concept. For the next two years a person who dies is allowed to pass his or her estate tax exemption to a surviving spouse. In effect, this could allow a married couple to pass up to twice the individual estate tax exemption amount to their children even if the couple has not done any tax-oriented estate planning. There are limitations to this provision, not the least of which is that it expires in 2013.
- Limited Time Only Planning Opportunity for the Wealthy: For individuals who are in a position to make lifetime gifts to grandchildren of several million dollars, a 0% GST tax rate in 2010 creates a unique planning opportunity only available until December 31, 2010. A person may transfer property in Trust two or more generations downward (i.e., to his or her grandchildren or great-grandchildren) while only paying gift tax (and not also GST tax, as would usually be the case), resulting in substantial overall transfer tax savings.
- Delaying the Sunset: The new tax changes only last for two years. In 2013, the estate, gift, and GST taxes all come back to a 55% tax rate and a $1 million exemption (though the GST and estate tax exemptions will be adjusted for inflation). Congress may change the law again before then, so we will continue to watch for the latest developments.