Temporary Estate, Gift and Generation Skipping Tax Relief
As you may know, President Obama has signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, P.L. 111-312 (“2010 Tax Act”). The 2010 Tax Act contains numerous significant changes that affect estate planning and taxes. Some key elements are:
Temporary estate, gift and generation skipping transfer tax relief.
The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) phased-out the estate and generation skipping transfer taxes so that they were fully repealed in 2010, reduced the gift tax rate to 35%, and increased the gift tax exemption to $1 million for 2010. The 2010 Tax Act reinstates the federal estate tax for 2011 and 2012 with a top rate of 35%. The exemption will be $5 million per person in 2011. The exemption amount is indexed for inflation beginning in 2012.
Portability of unused exemption.
The $5 million exemption will be portable. For estates of decedents dying after December 31, 2010, an Executor will be allowed to transfer any unused exemption to the surviving spouse.
Reinstatement of Stepped Up Basis
For a decedent dying in 2010, the decedent’s income tax basis in his property was “carried over” to his heirs, subject to a limited basis adjustment. The 2010 Tax Act reinstates “stepped up” basis; for a decedent dying after December 31, 2010, the basis in his capital assets are stepped up to date of death value. Executors of decedents who died in 2010 can elect to use carry over basis under the 2010 rules or the stepped up basis under the 2011 rules.
Prior to EGTRRA, the estate and gift taxes were unified, meaning that the exemption could be used for lifetime gifts and/or bequests at death. EGTRRA decoupled these systems. The 2010 Tax Act reunifies the estate and gift tax. After December 31, 2010, the $5 million exemption may be used for lifetime gifts or gifts at death. The annual exclusion for gifts made in 2011 remains at $13,000.
Generation skipping trust (GST) exemption
The 2010 Tax Act sets a $5 million generation-skipping exemption for decedents dying after 2010.
These temporary fixes compel you to undertake a review of your current estate plan to ascertain whether there are any changes that should be considered at this time. For many clients, there may be no issues, but for others, there may be planning opportunities. As mentioned at the outset, these new tax law provisions sunset on December 31, 2012.
Estate tax or not, you still need a plan. Estate planning is much more than tax planning. Planning is still required to assure the appropriate distribution of your assets at your death, and since those assets may be considerably larger now that fewer estates will be subject to the federal estate tax, rethinking how and when beneficiaries should receive significant assets should become a priority. Planning to avoid the unnecessary costs of probate, especially during lifetime (i.e. guardianship of a disabled adult), planning to limit claims of creditors, and planning to minimize disputes among family members continue to warrant careful consideration.
Retirement plans are still “tax cursed.” When distributed to a beneficiary at death, the monies received will still be subject to income tax. The Treasury has revised the method for calculating required minimum distributions from IRAs during lifetime, and provided some tax-advantaged options for certain designated beneficiaries after death. These rules do greatly simplify planning and individuals with retirement accounts should take this time to review their plans to see if they should rethink their designated beneficiaries.
There is good news for those with charitable intentions and retirement plans. The 2010 Tax Act extends for one more year the $100,000 “charitable rollover” of IRA distributions for anyone older than 70 ½. A taxpayer can direct up to $100,000 from an IRA to a charity and not have the amount included in his gross income. Charitable rollovers made in January 2011 can be treated as if they were made in 2010.