Estate and Gift Tax Relief in the 2010 Tax Relief Act
Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), there was no estate tax for decedents dying in 2010, but estate and other transfer taxes were scheduled to rise substantially for post-2010 transfers. The 2010 Tax Relief Act provides temporary relief. Among other changes, it reduces estate, gift and generation-skipping transfer (GST) taxes for 2011 and 2012 and continues other estate and gift tax relief provisions that were set to expire after 2010. It preserves estate tax repeal for 2010, but in a roundabout way: estates wanting zero estate tax for 2010 must elect that option, along with the modified carryover basis rules that were set to apply for 2010. Otherwise, by default, the estate tax is revived for 2010, with a $5 million exemption, a top tax rate of 35%, and a step-up in basis. Also, for estates of decedents dying after Dec. 31, 2010, a deceased spouse's unused exemption may be shifted to the surviving spouse. However, these generous rules are temporary. Much harsher rules are slated to return after 2012.
Increased Exemption and Reduced Top Rate
The 2010 Tax Relief Act lowers estate and GST taxes for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million and reducing the top rate from 55% to 35%. The $5 million exemption is per person. Thus, there is a $10 million exemption for a married couple. Plus there is a new portability feature for married couples.
Special Choice for 2010 Decedents
The 2010 Tax Relief Act allows estates of decedents dying in 2010 to choose between (1) estate tax (based on a $5 million exemption and 35% top rate) and a step-up in basis, or (2) no estate tax and modified carryover basis. Therefore, a recipient of property acquired from a decedent who dies after Dec. 31, 2009 generally will receive fair market value (i.e., "stepped up") as of the decedent's date of death. However, if an executor chooses no estate tax for a decedent dying in 2010, modified carryover basis rules apply.
Gift Tax Changes
Under the 2010 Tax Relief Act, for gifts made in 2010, the exemption is $1 million and the gift tax rate is 35%. For gifts made after Dec. 31, 2010, the gift tax is reunified with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35%.
Portability of Unused Exemption between Spouses
Under the 2010 Tax Relief Act, any exemption that remains unused as of the death of a spouse who dies after Dec. 31, 2010 is generally available for use by the surviving spouse, as an addition to the surviving spouse's exemption. A surviving spouse may use the predeceased spousal carryover amount in addition to his or her own $5 million exclusion for taxable transfers made during life or at death. A deceased spousal unused exclusion amount is available to a surviving spouse only if an election is made on a timely filed estate tax return of the predeceased spouse on which such amount is computed, regardless of whether the estate of the predeceased spouse otherwise must file an estate tax return.
These rules are complex and require the assistance of a qualified professional to undertand the options and ensure compliance. Executors are strongly advised to consult with a professional as soon as they become aware of their fiduciary responsibility.
Contact us to arrange your consultation with one of our experienced advisors about this or any of your tax-related concerns by calling us at 510 223-6300.
