Estate Tax Update

Posted by Bob Burton on Wed, Dec 22, 2010 @ 02:20 PM

As all of you must know by now, the compromise tax bill passed by Congress last week and signed into law by the President not only extended the existing income tax cuts for two more years for everyone, even the most wealthy, extended unemployment benefits for 13 more months, and made certain other significant changes, but it also reinstated estate taxes for the next two years.  Some key provisions of the bill as it relates to estate, gift, and generation-skipping taxes will be covered in this and subsequent blog posts.  Sales ideas will also be presented.  Here are the most important immediate things to know:

1.   To the great surprise of most practitioners and almost everyone else, the deal made by the President with the Republican leaders in Congress set the estate tax exemption at a whopping $5,000,000 per person ($10,000,000 per couple), and the estate tax rate at an historically low 35%.  On top of that, for 2012, the $5,000,000 exemption amount will be indexed for inflation.

2.   Estate, gift, and generation-skipping taxes were re-unified, as they had been before the 2001 tax law.  This means that the $5,000,000 exemption amount (indexed) and 35% tax rate also apply to lifetime gifts and to generation-skipping transfers. 

3.   For decedents who died, or die, in 2010 (under the law that has no estate or generation-skipping tax but still a gift tax, and that has complicated modified carry-over basis rules), estates can now choose between the 2010 law and the new law.  For individuals with estates over $5,000,000, or married couples with estates over $10,000,000, the decision-making process will require detailed calculations, but for individuals or couples within those limits, the choice will almost always be simple:  elect the new law, because there will still be no estate tax, and the “new basis at death” rules will apply rather than modified carry-over basis.

4.   The exemption amount of the first spouse to die is now “portable” into the estate of the surviving spouse.  This is beneficial in those situations where adequate planning was not done, and the estate of the first spouse to die fails to utilize the full exemption amount.  In order to deal with multiple marriages, the law contains a provision that prevents the surviving spouse from using the exemption amount of more than one predeceased spouse.

Keep in mind that, as with the extension of the income tax cuts, which “sunset” at the end of 2012, so do these new estate tax provisions “sunset” at the end of 2012.  In other words, the tax compromise bill was only a temporary patch, which served to defer for two more years the real challenge of enacting a permanent fix to both income taxes and estate taxes.  Put another way, why do today what can be put off until tomorrow?  Or, “Not on my watch”. 

If you have any questions or comments, please contact me.

Bob Burton LLB CLU ChFC AEP
Director of Advanced Planning