On December 17, 2010, President Obama signed into law PL 111-312, also known as the “Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010.”  The Act created certainty in the estate, gift and generation-skipping transfer (“GST”) tax laws for 2010 decedent estates and for those who may die in 2011 and 2012.  The Act also created a new uncertainty – what federal taxes, if any, will apply to lifetime and death transfers after 2012?

The important tax provisions of the new federal law that relate to estate planning are outlined below.

Estate Tax

  1. The federal estate tax exemption has been increased to $5 million per person with a tax rate of 35% applicable on the taxable estate in excess of this exemption.
  2. This new estate tax exemption and rate are automatically applicable to 2010 decedents unless the Personal Representative elects to have the “old law” (no estate tax and a modified carry over basis) apply.  In some instances where the estate of a 2010 decedent exceeds $5 million, such an election will be advisable.
  3. Nearly all assets (with certain exceptions) of a decedent including those dying in 2010 now get a step-up in tax basis to the fair market value on the decedent’s date of death instead of the modified carryover basis which would otherwise have been applicable to 2010 decedents.  “Tax basis” is the number subtracted from the sales price of an asset to determine capital gain or loss.
  4. Effective 2011, a surviving spouse may in most situations use a deceased spouse’s unused exemption on the survivor’s death if an election is made on the deceased spouse’s estate tax return (referred to as “portability”).  For example, if a deceased husband’s estate did not use any of his estate tax exemption at his death due to the unlimited marital deduction, the surviving wife could utilize a $10 million exemption (her own $5 million exemption and her predeceased husband’s $5 million exemption).  It is unclear as to whether portability would apply after 2012 to surviving spouses unless the provision is extended.

Gift Tax
Beginning in 2011, the gift tax exemption is reunified with the estate tax exemption at $5 million with a tax rate of 35% applicable for gifts in excess of the exemption.  The annual exclusion amount applicable to most gifts remains at $13,000 per donor and per donee for 2011.  There is no portability between spouses of the gift tax exemption but spouses can continue to elect to treat gifts by one spouse as shared by the couple.  The effect is that a married couple may together make lifetime gifts of $10 million beyond the annual exclusion.  The amount that can pass tax-free at death continues to be reduced by gifts beyond the annual exclusion amounts.  Note that as under current law, assets gifted during life do not receive a step up in tax basis.

Beginning in 2011, the GST tax exemption is also set at $5 million with a tax rate of 35%.  There is no portability between spouses of the GST exemption but an election by a married couple to split gifts by one spouse also applies for GST purposes.  For 2010, the GST tax rate is 0%, meaning transfers in 2010 are not taxed but reduce the available exemption in future years.

Nine Month Extension
In the case of 2010 decedents who died before December 17, the law grants a nine month extension of time from enactment for their estates to:  (1) file an estate tax return and pay any applicable taxes; (2) make GST tax exemption allocations; (3) elect to use the modified carryover basis and file the applicable return; and (4) make necessary disclaimers for tax planning purposes.  The due date for those actions is September 17, 2011.

Charitable Planning 
The law extends the ability of an individual who has attained age 70 ½ to make a charitable donation (to most charities with certain exceptions) of up to $100,000 from one or more individual retirement accounts.  Under the new law, an individual can make such a donation for 2010 if made prior to February 1, 2011 and can make a similar donation for 2011 if made prior to January 1, 2012.  The ability to make the transfer directly from the IRA allows a charitably-minded individual the opportunity to make a donation from pre-tax funds without having to include the distribution amount in income.

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