Diserio Martin O'Connor & Castiglioni LLP

Congress Finally Addresses the Estate Tax

January 11, 2011


While the rest of us were busy preparing for Christmas and the New Year, Congress was busy at work dealing with the estate tax law that was scheduled to “sunset” at the end of 2010.  This work resulted in the 2010 Tax Relief Act, which was signed into law by the President on December 17, 2010.  The new law makes significant changes to the estate and gift tax laws and many of the changes are retroactive to January 1, 2010.  Generally, the changes are beneficial to taxpayers. 

Here are the transfer tax highlights of the new law:

-$5,000,000 estate, gift and generation skipping transfer tax exemption for 2011 and 2012

-Top estate tax rate of 35% for 2010, 2011 and 2012

-Step up in basis of inherited assets to date of death value with ability for 2010 estates to opt out in order to utilize the unlimited estate tax exemption available for 2010 estates under prior law

-Portability of the estate tax exemption between spouses for 2011 and 2012

-Generation Skipping Transfer Tax is effective for 2010, but with a 0% tax rate

-Option for 2010 estates to elect to have the provisions of the prior estate tax law apply (no estate tax and modified carry over basis for inherited assets)

NOTE: All of these provisions sunset on December 31, 2012 and the $1,000,000 estate tax exemption returns with a top estate tax rate of 55% as of January 1, 2013.

So what does all of this mean to you?  The changes in the 2010 tax act are extensive.  All estate plans should be reviewed in light of these changes to determine whether the plan needs modification. 

2011 and 2012 provide a unique opportunity for gifting to take advantage of the historically high gift tax exemption of $5,000,000.  Under the prior law, even though the estate tax exemption had increased to $3,500,000 by 2009, the gift tax exemption was limited to $1,000,000.  Individuals who had used their $1,000,000 lifetime gift tax exemption now have an additional exemption of $4,000,000 that can be used in 2011 or 2012.  Because we don’t know what will happen with transfer taxes in 2013, this option may be limited to 2011 and 2012.  Individuals may be well advised to evaluate their options and consider making substantial gifts in the next year or two while they have the ability to make sizable tax-free gifts.

Executors of estates of decedents dying in 2010 in excess of $5,000,000 need to evaluate whether it is beneficial to elect to have the modified carry over basis and no estate tax apply.  If no action is taken, estates of individuals who died in 2010 have a $5,000,000 exemption and a maximum tax rate of 35%.  For a large estate that does not have low basis assets, the election to utilize carry over basis and an unlimited estate tax exemption could result in lower overall taxes than utilizing a stepped up basis for the estate assets and a  $5,000,000 estate tax exemption.  It is important that all options be considered and an informed decision be made in each case.

For many clients, the disclaimer funded estate tax sheltered trust will still be the best option to take advantage of the estate tax exemption available to each individual.  Although the 2010 tax act allows a surviving spouse to use the unused estate tax exemption from a deceased spouse, “portability” is a temporary provision as it is not clear whether it will continue beyond 2012. In addition, the mechanism for electing portability could be more cumbersome than disclaiming assets to fund an estate tax sheltered trust.  In order to elect portability, the estate will need to file a Federal estate tax return which would not otherwise be required.

If you would like to have an attorney in our Trusts and Estates Department review your current situation in light of these changes, please contact us.