Estate and Gift Tax Alert

The Tax Relief Act of 2010 was overwhelmingly passed by Congress and signed into law by President Obama on December 17, 2010. The new law provides numerous tax benefits for businesses and individuals for the next two years, including:

  • Continuing Bush era income tax rates, with a top rate of 35%.
  • Reducing employee's share of social security taxes from 6.2% to 4.2%.
  • Increasing the estate, gift, and generation skipping transfer (GST) tax exemptions to $5 million and reducing the tax rate to 35%.

The estate, gift and GST tax benefits are generous for 2011 and 2012.

Estate Tax Changes

  • The estate tax is reinstated to apply to estates of decedents dying after December 31, 2009, with an exemption of $5 million and a rate of 35%.
  • However, for decedents who died in 2010, the estate tax may be avoided by an election to apply the carry-over basis tax system instead, with its basis step-up of $1.3 million plus an additional $3 million for assets passing to a spouse.
  • For decedents dying in 2011 and 2012, unused estate tax exemption is made portable, so that it can be allocated to a surviving spouse to be claimed for estate (but not GST) tax purposes. In effect, this provision allows a total of $10 million to pass free of tax to the next generation even if assets are all owned jointly or solely by one spouse.
  • The exemption amount is indexed for inflation beginning in 2012.

Gift Tax Changes

  • The gift tax exemption is once again unified with and increased to the amount of the $5 million estate tax exemption.
  • The gift tax rate is 35%.

Generation Skipping Transfer Tax Changes

  • The GST tax is reinstated for transfers made after December 31, 2009, with a $5 million exemption.
  • The GST tax rate is 35% for 2011 and 2012 (but zero for 2010).

What Remains the Same

  • State estate and inheritance taxes remain in place, with exemptions significantly lower than the $5 million Federal exemption: $1,000,000 for New York; $3,500,000 for Connecticut; $675,000 for New Jersey.

Planning Opportunities

  • For estates of 2010 decedents, post-mortem tax planning opportunities may be very significant, particularly to reduce or avoid state estate taxes, and to avoid GST taxes on transfers to grandchildren.
  • Planning vehicles made attractive by current low interest rates and depressed asset values continue to be attractive, including Grantor Retained Annuity Trusts (GRATs), Charitable Lead Trusts (CLTs), Qualified Personal Residence Trusts (QPRTs) and Sales to Intentionally Defective Grantor Trusts (SIDGTs).
  • The increase in the gift tax exemption to $5 million creates additional opportunities in 2011 and 2012 to make lifetime transfers to avoid estate taxes on appreciation and to transfer assets to grandchildren and future generations.

Caveat

  • The estate, gift and GST tax provisions sunset on December 31, 2012, leaving their continuation to the next Congress and its successors.

Revisiting Your Planning

  • Estate planning is a complex process in which many factors, both tax and non-tax, may have great significance. The new tax law may impact how your heirs benefit under your current Will and may present new opportunities to provide for your heirs. We would be pleased to review your existing estate plan in light of the new law to ensure that it reflects your wishes and takes advantage of the tax benefits now available.

If you have any questions about the new law or other estate planning and administration issues, please contact Linda Wank at 212.826.5546, or lwank@fkks.com, Barbara Shiers at 212.826.5526 or bshiers@fkks.com, Joseph Mahon at 212.826.5526 or jmahon@fkks.com or any other member of the Frankfurt Kurnit Estate Planning & Administration Group. We wish you a very happy New Year.

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