Proposed Tax Legislation – Update January 17, 2011
The Tax Relief, Unemployment Insurance Reauthorization,
and Job Creation Act of 2010
The President signed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Law”) into law on December 17, 2010.
Estate Tax in 2010.
· For 2010 decedents, the default law is reinstatement of the federal estate tax with a $5 million exemption, 35% tax rate and full step-up in income tax basis to the fair market value on date of death. IRS Form 706 would be filed for decedent’s exceeding the $5 million threshold amount. The filing deadline for IRS Form 706 will be 9 months after the date of enactment. (September 19, 2011)
· However, 2010 decedents have the option to elect out of the default law. The opt-out election results in no federal estate tax would apply but the carryover basis regime would apply. Under the carryover basis regime, each decedent is allowed a $1.3 million increase in basis to fair market value. An additional $3.0 million increase in basis is available for qualifying assets passing to or for the benefit of the decedent’s spouse. The allocation of basis increase is made on IRS Form 8939.
Estate Tax in 2011 and 2012.
· For 2011, the Law provides a $5 million estate tax exemption amount.
· Starting in 2012, the $5 million estate tax exemption amount will be indexed for inflation in $10,000 increments.
· The estate tax rate will be 35% for 2011 and 2012. Unless the Law is extended by legislative action, it will not apply in years following 2012.
Gift Tax in 2010.
· The gift tax exemption amount for 2010 remained at $1 million with a 35% tax rate.
Gift Tax in 2011 and 2012.
· The gift tax is reunified with the estate tax meaning that the gift tax exemption is the same as the estate tax exemption for 2011 (i.e., $5 million) and 2012 (i.e., $5 million as indexed for inflation).
· The tax rates are also the same (i.e., 35%).
Generation Skipping Transfer (GST) Tax in 2010.
· For GST transfers during 2010, the GST tax rate is zero.
· The GST exemption amount for 2010 is $5 million. Legal advisors should be consulted on whether or not GST exemption should be allocated to any GST transfers in 2010.
· Regardless of whether the repeal of the estate tax is elected for a 2010 decedent, such decedent is treated as the transferor for GST purposes.
· The filing date for GST tax returns for GST transfers made before enactment of the Law will be nine months after the date of enactment. (September 19, 2011)
· The filing date for GST tax returns for 2010 decedents will also be nine months after the date of enactment. (September 19, 2011)
GST Tax in 2011 and 2012.
· For 2011, the GST exemption amount is $5 million.
· For 2012, the $5 million GST exemption amount will be indexed for inflation.
· Because the GST tax rate is equal to the maximum estate tax rate, the GST tax rate for 2011 and 2012 is 35%.
Spousal Portability.
· Beginning in 2011, a decedent’s unused exclusion amount may be used by such decedent’s surviving spouse if the surviving spouse dies in 2011 or 2012. In other words, the exemption amount for the surviving spouse will be the basic $5 million exemption amount, as indexed for inflation, plus the unused exemption amount of the predeceased spouse.
· The unused exemption amount of the predeceased spouse is not indexed for inflation.
· For the portability to be applicable, the first spouse must die after 2010 and the surviving spouse must die before 2013, unless new legislation is passed to extend portability.
· Further, if a surviving spouse remarries, only the most recent deceased spouse’s unused exemption may be used by the surviving spouse.
· The estate of the first spouse to die must file IRS Form 706 to establish the amount of the unused exemption.
· Bypass trusts, which are funded with assets having a maximum value equal to the deceased spouse’s exemption amount to preserve the predeceased spouse’s related tax credit, will continue to be important notwithstanding portability because a bypass trust allows the appreciation in value of the trust’s assets to avoid taxation at the surviving spouse’s death.
· Bypass trusts also preserve the predeceased exemption regardless of whether the surviving spouse remarries and regardless of whether new legislation is passed to extend portability.
· Portability applies for the gift tax exemption as well as for the estate tax exemption.
· Portability does not apply for the GST exemption.
Proposed Tax Legislation – Update December 20, 2010
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law on December 17, 2010 by President Obama.
Proposed Tax Legislation – Update December 17, 2010
The House has passed the proposed tax legislation by a vote of 277-148. President Obama is expected to sign the legislation into law this afternoon.
Proposed Tax Legislation – Update December 15, 2010
The Senate has passed the proposed tax legislation by a vote of 81-19. The House is expected to vote on the legislation on Thursday, December 16, 2010.
Proposed Tax Legislation - Update December 13, 2010
The tax deal proposed by President Obama and Congressional Republicans provides for a $5,000,000 exemption for the gift, estate and generation skipping transfer (GST) taxes for 2011 and 2012 with a 35% top tax rate. The exemption amounts would be indexed for inflation beginning in 2012.
For 2010, the GST exemption would be $5,000,000 with a 0% rate.
For decedents who died in 2010, there is a choice of no estate tax and modified carryover income tax basis or a $5,000,000 exemption with full step-up in basis and 35% tax rate.
The proposed legislation also provides for portability of a spouse’s estate tax exemption so that estate planning documentation requirements would be eased for purposes of utilizing both spouse’s exemptions.
If no new legislation is passed, the gift and estate tax exemption will revert to $1,000,000 in 2011 with a 55% top tax rate. The GST exemption would be $1,000,000, as indexed for inflation to $1,340,000, with a 55% rate.
As a comparison, in 2009, the exemption amount for the estate and GST taxes was $3,500,000, and the gift tax exemption amount was $1,000,000. The top tax rate was 45%.