2010 Tax Relief Act: Is it Time to Give?


The enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “2010 Tax Relief Act”) on December 17, 2010, created the opportunity to make larger non-taxable gifts than ever before under the modern federal estate and gift tax systems. But it also created many questions and uncertainties. While practitioners and clients applauded the increased “lifetime” exemption to $5,000,000, care and thought must be taken before making a substantial gift.

Due to the reunification of the estate, gift and generation-skipping transfer tax system, a $5,000,000 exemption is now applicable to estate, gift and generation-skipping taxes. This allows a substantial amount of wealth to be transferred without incurring what was previously an onerous tax. Indeed, in addition to the significant increase from the previous $1,000,000 exemption on lifetime gifts, the 2010 Tax Relief Act also capped the highest gift tax rate at 35%, which is a significant savings from the previous gift tax rate of 45%. Left unaffected is the annual gift exclusion of $13,000 per year per recipient, which is subject to future adjustment for inflation.

Taking advantage of the increased lifetime exemption may require fairly swift action. The 2010 Tax Relief Act is effective only through December 31, 2012. Unless Congress passes new legislation, the 2001 Internal Revenue Code provisions will be reinstated beginning January 1, 2013. For gifting purposes, that means the exemption will drop back to a $1,000,000 lifetime exemption and the top gift tax rate will jump to 55% from 35%.

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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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