January 2011

The December 2010 Tax Act


On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The new law includes sweeping new tax legislation that makes significant changes to estate, gift and generation-skipping transfer (“GST”) taxes. This new law may impact your existing estate plan and we strongly encourage your meeting with us to review it. In addition, the new law may also provide an excellent opportunity to implement additional planning that could be beneficial.

The favorable tax provisions of the new law last for two years only and will sunset at the end of 2012, at which time Congress will either pass new legislation or allow the provisions of the 2001 tax law to take effect ($1 million exemption and a top estate and gift tax rate of 55%). To ensure you are maximizing the planning opportunities, it is prudent to review your entire estate plan to determine what options are available for your individual situation.

A brief overview of the major changes to the federal estate, gift and GST tax system, all of which are effective January 1, 2011, is as follows:

Favorable Changes to Exemptions and Rates. The estate, gift and GST exemptions are $5 million per individual (adjusted for inflation after 2011) and the tax rate is 35%. Compare this to the exemptions and rates in effect just prior to the “repeal” of 2010: the estate and GST exemptions were then capped at $3.5 million, the gift tax exemption was capped at $1 million and the top tax rate was 45%.

Lifetime Gifting Opportunities. An individual’s lifetime gift tax exemption increases from $1 million to $5 million (i.e., $10 million per married couple) so that the gift tax exemption is now unified with the estate tax exemption. For those individuals who have previously utilized the full $1 million lifetime gift exemptions, the new tax law permits an additional $4 million of lifetime gifting gift tax-free. There are more planning opportunities to make significant lifetime transfers without paying gift tax which can be explored. The annual gift exclusion remains at $13,000 per person in 2011 (or $26,000 per married couple).

Estates of Persons Who Died in 2010. For those who died in 2010, the new law provides a choice with respect to estate taxes: The default rule is that the “historical” estate tax regime applies, but at a 35% rate and with a $5 million estate tax exemption. However, the executor can opt out of the estate tax regime and instead choose the carryover basis regime, meaning there will be no federal estate tax but the decedent’s beneficiaries will not get a stepped-up basis for appreciated assets they inherit (subject to a limited right to increase the basis by $1.3 million for any beneficiaries and an additional $3.0 million for spouses). The new law also extends until September the due date of any death-related tax returns.

Omissions from New Legislation. The new law does NOT restrict the use of valuation discounts when transferring ownership interests in family entities as a part of a gift giving program and the new law does not impose additional requirements for creating grantor retained annuity trusts (“GRATs”). Thus, these very effective transfer techniques (which were thought to be on the “chopping block”) remain as potential gifting strategies.

Using Exemption of Both Spouses. The estate tax exemption for a deceased spouse is now “portable,” meaning the surviving spouse can use the unused estate tax exemption of the “last deceased spouse.” The finer points of portability (and planning associated with it) are complex, and proper thought and consideration needs to be given to each client’s individual situation to ensure it is handled correctly.

As mentioned above, the new tax is NOT permanent – it sunsets at the end of 2012. Due to the temporary nature of the new law, clients may want to take advantage of the additional $4 million of tax-free gifting that is available for the next two years. However, each client’s situation is different and should be carefully considered before any action is taken. Please contact a member of our Estate Planning Department to review how these changes may affect your estate plan – whether or not we drafted your estate planning documents. We are happy to work with you to determine what steps, if any, should be taken to achieve your estate planning objectives.

If you have any questions about this article, please contact James B. Ellis, Ellen I. Kahn, Hilary C. Pierce, Sandra B. Price, or C. Jean Ryan at Sideman & Bancroft.

Best wishes for a happy and healthy New Year.

This publication is for informational purposes only and is not intended to provide legal or tax advice, or to create an attorney-client relationship.

Pursuant to IRS Circular 230, unless expressly stated to the contrary, any tax advice is not intended and cannot be used to (i) avoid penalties under the Internal Revenue Code or (ii) promote, market or recommend any transaction or matter to another party.