Extension of Tax Relief Brings Transfer Tax Certainty – at Least Until 2013


While 2010 was a year of both uncertainty and opportunity for estate planning, 2011 and 2012 will be years of great opportunity. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed into law by President Obama on December 17, 2010, makes substantial albeit temporary changes to the federal gift, estate and generation skipping transfer (GST) taxes. The new law was enacted just days before the 10-year phase out and repeal of the estate and GST tax was set to expire and we would have returned to a $1,000,000 estate tax exemption and 55% maximum rate. The highlights of the new law include an exemption of $5,000,000 and maximum rate of 35% for all three taxes. Of particular significance, beginning in 2011 the lifetime gift tax exemption will increase from $1,000,000 to $5,000,000, so a married couple will be able to give away a cumulative total of $10,000,000 free of gift tax. The law also permits a surviving spouse to utilize the unused estate tax exemption of a predeceased spouse. These changes will be in effect for just two years, but the increase in lifetime exemption will permit people who are in a position to make substantial gifts during this period to take full advantage of that exemption right away.

Special Rules for 2010

The new law clarifies the rules applicable to gifts made and decedents dying during 2010.

• For 2010 gifts, the law remains unchanged—the lifetime exemption is $1,000,000 and the tax rate on the excess over that amount is 35%.

• The estate tax has been restored retroactively for 2010 with a $5,000,000 exemption, a 35% rate and a full basis step-up, although estates of decedents dying during the year will have the opportunity to elect out of the estate tax and instead receive only a limited basis step-up under the rules that had been in effect prior to the new legislation.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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