he Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act was signed into law on December 17, 2010, providing two years of tax relief and planning opportunities. The December 2010 Act addresses the “sunset” of our transfer tax system with higher exemption amounts andlower tax rates through December 31, 2012.
Estate Tax Implications:
• 2010 Election. For decedents dying in 2010, the estate tax exemption is $5,000,000, with a maximum tax rate of 35%, and beneficiaries will receive a “stepped-up basis” for beneficiaries receiving the inherited assets. Alternatively, or decedents passing in 2010, the personal representative may elect out of the application of the new estate tax law, such that no estate tax will be due and beneficiaries will receive a “carry-over” basis in the inherited assets, subject to the $1.3 million“stepped-up” basis allowance for all beneficiaries and the $3 million “stepped-up” basis allowance for assets passing to a surviving spouse.
• 2011 and 2012. The estate tax exemption will continue at $5,000,000, with a maximum tax rate of 35% and a “stepped-up basis” for beneficiaries receiving the inherited assets.
• Portability. A surviving spouse will receive both a personal $5,000,000 exemption, together with the unused exemption of the “last” deceased spouse. For example, if a deceased spouse has $2,000,000 remaining of his $5,000,000 exemption amount, the surviving spouse will have a total of $7,000,000 available for her use. There are a few caveats for “portability:
- The executor of the first spouse’s estate must file an estate tax return on a timely basis and elect for the surviving spouse to be able to use the unused exemption amount;
- Portability only applies to the “last deceased spouse,” and therefore re-marriage does not remove the right to use the exemption, unless the new spouse dies first, which would classify the new spouse as the “last deceased spouse,” for purposes of portability; and o Portability does not apply for Generating Skipping Tax (“GST”) purposes.
• Extension of Time. By virtue of the December 2010 Act, several filing deadlines have been extended including:
- Estate and GST returns for the decedents dying in 2010 will be extended to nine months following the date of enactment of the December 2010 Act;
- Personal representatives electing out of the new estate tax law for 2010 will be required to file a carryover basis report within nine months after the date of enactment of the December 2010 Act ; and for decedents dying in 2010, the extension of time to make a qualified disclaimer of property is nine months following the date of enactment of the December 2010 Act.
Gift Tax Implications:
• Beginning on January 1, 2011, the gift tax exemption amount will be increased to $5,000,000, with a maximum tax rate of 35%, matching the estate tax exemption amount. Essentially, a married couple may transfer up to $10,000,000 without any gift tax consequences for the next two years, which offers a planning opportunity for some families. The gift tax exemption for 2010 remains $1,000,000 at a maximum rate of 35%.
• During 2010. Similar to the estate tax, the GST exemption amount is $5,000,000 for decedents dying in 2010.
• 2011 – 2012. The GST exemption amount will be $5,000,000, with a maximum tax rate of 35%; however, as noted above, the portability provisions of the estate tax law do not apply to GST exemption amounts.
Notable Transfer Tax Items not included in the December 2010 Act:
• GRAT Terms. There has been discussionabout limiting GRATs (Grantor Retained Annuity Trust) to a minimum term of 10 years, however, this is not addressed in the December 2010 Act.
• Valuation Discounts. The tightening of valuation discounts of intra-family wealth transfers was not discussed or addressed in the December 2010 Act.
• Farmland Exemption. Exempting farmland from the federal estate tax is not mentioned nor included in the December 2010 Act.
• A review of your estate planning documents may be in order in the event you have created trusts incorporating formula clauses linked to the estate tax, the increase of the exemption amount to $5,000,000 may mean that your estate plan no longer fulfills your wishes.
• With these increased exemption amounts for the next two years, now may be an opportune time to set up various grantor trusts and other estate planning transfer strategies leveraging the $5,000,000 exemption amount to lower future estate tax exposure. • T he personal representatives and trustees for decedents dying during 2010 will now need to evaluate whether they should proceed under the automatic rule of the estate tax application or opt out of such default rules.
If you have any questions, feel free to contact the attorneys in our Estate Planning and Trust Administration Department at Blalock Walters, P.A. for additional information.
Also, as a service to our clients, Blalock Walters, P.A. will be hosting a series of Estate Tax Briefings beginning January 2011. As a client of the firm you are invited to attend this complimentary session that will review both the possible impacts and planning opportunities for your estate plan. To find out more or to register, please contact Elaine at 941-748-0100 or via email at email@example.com.