The Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (TRA 2010) re-established the federal applicable exclusion amount (both the estate exemption and the lifetime gift exemption) at $5 million, the federal generation skipping transfer (GST) tax exemption at $5 million and provided for a maximum federal estate, gift and GST tax rate of 35% for 2011 and 2012. Prior to the enactment of TRA 2010, the Economic Growth and Tax Relief Reconciliation Act of 2001 phased out the estate and GST taxes so that they were fully repealed in 2010 and simultaneously lowered the top gift tax rate to 35%. In accordance with the "sunset" provision within the 2001 law, the estate, gift and GST tax laws were scheduled to return in 2011 to pre-2001 levels, which included estate, gift and GST exemption amounts equal to $1 million and a maximum tax rate of 55%. TRA 2010 stepped in and created a 2-year window in 2011 and 2012 where the estate, gift and GST tax exclusion amounts were increased to $5 million and maximum tax rate was set at 35%.
In a significant change to the transfer tax system, TRA 2010 now allows for "portability" of the estate and lifetime gift exemption between spouses dying in 2011 or 2012. Furthermore, TRA 2010 retroactively reinstated the estate tax for persons dying in 2010, but gave executors of 2010 decedents the choice as to whether to apply a limited carryover basis with no federal estate tax or alternatively a full basis step-up with an estate tax and a $5 million exemption on asset transfers from the deceased.
The rules will change again on January 1, 2013, when, absent additional legislative action, the "sunset" provisions of the 2001 law become effective once more. As a result, the pre-2001 estate, gift and GST tax exemption amount of $1 million will be reinstated and the maximum transfer tax rate will rise to 55%. All other provisions of TRA 2010 will be repealed, including "portability" of the estate and lifetime gift exemption amount between spouses. While Congress may act to change the federal estate, gift and GST tax rules prior to January 1, 2013, we cannot anticipate any legislative changes that may occur.
Here are a few important concepts to consider in 2011.
State Death Taxes
Most states impose some inheritance or death tax. We recommend that our clients consult with their tax and legal advisors regarding death taxes in their state of residence.
Gifting
Transfers of up to $13,000 per year, per individual, may be made by each spouse. This does not erode your $5 million lifetime gift amount. Remember, on gifts made during your life, the recipient takes your cost basis. Inherited assets may be eligible for an increase in basis to date of death value.
Morgan Keegan does not provide legal or tax advice. We recommend that our clients consult with their tax and legal advisors regarding estate planning in light of recent or future tax law changes.
