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Tax Bill Brings Big Changes, Some Clarity, to Estate Tax Rules (for Now)

December 17, 2010

The 2010 tax bill, expected to be signed into law by President Obama this afternoon, will have a dramatic impact on estate and gift tax rules, bringing increased exemptions, reduced rates, and some much needed certainty to estate planning. But its effects are only temporary, and taking advantage of its temporary provisions will require careful planning in the coming months.

The "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010," approved by the House of Representatives last night, provides a number of changes to the estate and gift tax. Most notably:

  • The estate tax is retroactively re-enacted for persons dying in 2010, with a $5,000,000 exemption and a maximum 35% tax rate. The 35% tax rate and $5 million exemption ($10 million for a married couple) also applies to persons dying in 2011 and 2012.
  • Heirs will receive a new "cost basis" in assets, eliminating any capital gains tax on appreciation that occurred during the decedent's lifetime. (This restores the rule as it applied before 2010).
  • For individuals who die in 2010, the estate can elect to pay no estate tax, regardless of its size, but in that event, heirs must use the less-desirable "modified carryover basis" rules for capital gains on inherited property.
  • Estate tax returns for persons dying in 2010 are due nine months after the date the Bill is enacted.
  • For gifts made in 2011 and 2012, the lifetime gift tax exemption is increased to $5 million per donor. (The $1 million lifetime gift tax exemption still applies to gifts made in 2010).
  • The gift tax rate will remain at 35% for gifts in excess of the lifetime exemption made in 2010 through 2012.
  • Some clarity is provided for the application of the arcane "generation-skipping transfer tax," applying a zero percent tax rate to 2010 taxable transfers, and a $5 million GST exemption for transfers made in 2011 and 2012.

The Tax Act also extends through 2011 the provision permitting taxpayers to make tax-free distributions of up to $100,000 from their IRAs directly to charity. In addition, taxpayers can elect to treat transfers made in January, 2011 as though they were made in 2010.

As widely noted in the press, the Tax Bill also extends unemployment benefits for 13 months, maintains current income tax rates for all taxpayers, reduces social security and self-employment taxes by 2% for 2011, and extends a number of other income tax benefits for individuals and small businesses.

While the higher estate and gift tax exemptions and lower rates present an opportunity for aggressive wealth transfer planning, these changes are temporary. We encourage you to contact us to discuss how these changes may impact your current estate plan, and to consider steps to capture the benefit of these favorable transfer tax opportunities before they expire.

IRS Circular 230 Disclosure:  As required by United States Treasury Regulations, you should be aware that this communication (including any attachment) is not intended or written by the sender to be used, and cannot be used, by any recipient for the purpose of avoiding any penalties that may be imposed under United States federal tax laws.