On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Tax Relief Act”) into law. In addition to extending the Bush-era income tax cuts originally enacted in 2001, the Tax Relief Act made significant changes to the federal gift, estate, and generation-skipping transfer taxes, including:
-Increasing the federal estate tax exemption to $5,000,000 (less any amount used against taxable gifts during life) and reducing the estate tax rate to 35%. As a result, a married couple, with proper planning, can pass up to $10,000,000 of property to their children or other beneficiaries without incurring any federal estate tax. As was true before, no estate tax is due on any amount left to a spouse (or to certain trusts for a spouse) or to charity.
-Increasing the federal gift tax exemption to $5,000,000 and retaining the gift tax rate of 35%. The Tax Relief Act thus “reunifies” the federal estate and gift tax exemptions and rates. Again, as before, no gift tax is due on gifts to a spouse (or to certain trusts for a spouse) or to charity.
-Increasing the federal generation-skipping transfer (“GST”) tax exemption to $5,000,000 and reducing the GST tax rate to 35%. The larger estate and gift tax exemptions can be combined with the increased GST tax exemption to create a substantial legacy of up to $10,000,000 to pass to children, grandchildren, and more remote lineal descendants without the imposition of future transfer taxes.
-Introducing “portability” of the federal estate and gift tax exemptions (but not the GST tax exemption), with the result that any unused portion of the $5,000,000 estate tax exemption of the first spouse to die is available to the surviving spouse for use against his or her lifetime gifts or estate taxes. Thus, if a husband did not use any of his federal gift tax exemption during his life and bequeathed all of his property to his wife, thereby using none of his federal estate tax exemption, his wife would have a $10,000,000 exemption, which she could use for making gifts during her life or at her death against the estate tax imposed on her estate (less any amount used by her against taxable gifts during life).
-Beginning in 2012, indexing of the federal estate, gift, and GST tax exemptions for inflation.
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