The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, signed into law December 2010, finally brought some certainty to estate tax, gift and generation skipping tax, at least temporarily. Although estate planning attorneys now have a better idea as to advising clients in wealth management opportunities, the new law only applies through December 31, 2012. Thus, we may find ourselves back in this position of uncertainty in two years. Some of the major aspects of the Act are summarized below:
- Estate tax exemptions and estate tax rates: Under President Bush’s Tax Relief Act of 2001, the federal estate tax exemption had increased to $3.5 million dollars in 2009, was unlimited in 2010, and was set to fall all the way back down to $1.0 million dollars in 2011. This problem was solved for the short term by setting the exemption at $5.0 million dollars for 2011 and 2012. Thus the first $5.0 million dollars of any estate is exempt from federal estate taxes. The maximum federal estate tax rate on those estates over $5.0 million dollars was capped at 35%. This will greatly decrease the number of estates subject to federal estate taxes. However, once again, this issue will need to be addressed again before January 1, 2013.
- Gift taxes: One of the less discussed aspects of the Tax Relief Act of 2010 is the increase in the gift tax exemption. Under the Bush Tax Relief Act of 2001, although the federal estate tax exemption kept increasing every year or two, the gift tax exemption was capped at $1.0 million dollars. Thus, individuals were limited to $1.0 million dollars in lifetime gifts before gift taxes were imposed. Now, the gift tax exemption mirrors the estate tax exemption, and for 2011 and 2012, is $5.0 million dollars. The excess is also taxed at a top rate of 35%. For families with large estates, this will provide a unique short-term opportunity to pass on wealth to one’s children during one’s lifetime without either gift or estate taxes imposed. However, the use of lifetime gifts reduces the individual’s estate tax exemption by the amount of the lifetime gifts. Generation skipping gifts (those passing to grandchildren, great-grandchildren, etc.) was also increased to $5.0 million dollars.
- Portability of unused estate tax exemption: This is a significant development allowing couples to achieve estate tax savings that before usually required an “A-B” trust or “marital” trust to accomplish. Under the new law, an executor may elect to transfer a decedent’s unused tax exemption amount to the decedent’s spouse to combine with the spouse’s own estate tax exemption amount. Thus, without the use of a trust, a couple can still shelter up to $10.0 million dollars from federal estate taxes.
Conclusion: The new Act brings short-term certainty and increased estate tax relief for everyone for at least the next two years. It also provides some unique estate tax planning opportunities for those families with very large estates. However, we may be back to the same uncertainty at the end of 2012 that we were at the end of last year. Thus, it is important to try to stay current as to new developments over the next two years and discuss any questions or proposed estate planning actions with your estate planning attorney, estate planning advisor and/or CPA.
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Joseph E. Balmer
Joseph Balmer manages the Probate, Trust and Estate Administration department at Dayton, Ohio, law firm, Holzfaster, Cecil, McKnight & Mues, and has been certified by the Ohio State Bar Association as a specialist in Estate Planning, Trust and Probate Law since 2006.