WHERE WE WERE, WHERE WE ARE, WHERE WE ARE GOING
In 2010, a deadlocked Congress unpredictably allowed the repeal of the federal estate tax by way of refusing to extend the federal estate and generation skipping transfer (GST) taxes. The federal “death tax” as its otherwise referred to, vanished on January 1, 2010 through the end of 2010 eliminating the federal estate tax against any and all estates regardless of their size (the previous estate tax exemption amount for 2009 was $3.5 million with a tax rate of 45% thereover). Despite a modified “carryover” basis rule that took the place of the previous “stepped up” basis rule, 2010 may very well have been a great year to die. (Tongue in cheek….. kind of).
If Congress hadn’t acted in December 2010, the estate and GST taxes would have been reinstated at their 2001 levels going forward in 2011 and beyond. This would have only allowed for the first $1 million of a person’s estate to pass on tax-free, with the remaining to be taxed up to a rate of 55% . Fortunately though, the 2010 Tax Relief Act was passed which changes the way federal estate, GST and gift taxes will be handled for 2011 and 2012.
Under the 2010 Tax Relief Act the first $5 million of an individual’s estate passes on tax-free, after that, the estate tax rate is 35%. There is also a “portability” (explained later) provision included that can allow for a surviving spouse to utilize any unused exemption amount of a decedent spouse. Further, in 2011 and 2012, the “stepped up” basis returns which is very beneficial to beneficiaries who sell inherited property that has increased in value during the decedent’s ownership of the property (reduces capital gain realized). The exclusion amount for gifts is unified with the $5 million estate tax exemption, which means that an individual can gift up to $5 million over the next two years without paying taxes on it. However if that individual were also to die in the next two years after giving away $5 million in lifetime gifts, then his entire estate would be taxed. The tax rate for any lifetime gifts given over $5 million is 35%.
One of the more interesting items in the 2010 Tax Relief Act includes a "portability" provision, as briefly mentioned earlier. Historically, in order for both spouses to maximize their total available exemption amount, assets had to be titled in a certain manner and different drafting provisions were necessary. ("Use it or lose it" was the warning). The new portability provision provides that if a spouse doesn't use their exemption, their spouse can use it. Thus, it could be possible for a surviving spouse to actually have a $10 million exemption available at death and pass $10 million tax free to their beneficiaries.
Any celebrations over the new 2010 Tax Relief Act should be tempered though. Remember, the new law expires at the end of 2012, and then the 2001 tax levels are automatically reinstated. While 2010 may have been a great year to die, and 2011 and 2012 aren’t bad either, watch out for 2013. Remember, these new rules only apply if you or your spouse die in 2011 and 2012. In sticking with the football playoffs and championships theme currently taking place, it might be appropriate to describe this move by Congress as a “punt”.
If you have not reviewed your estate planning documents for some time, now would be a good time to dig them out of your files and have one of our estate planning attorneys review your plan. Even if you recently had your will or trust prepared, some fine tuning may be necessary for your plan to work as intended. Call us to discuss your options for plan adjustments.