The Past
Options for Estates of Individuals who Died in 2010
Prior to Tax Relief 2010, the federal estate tax was scheduled to be repealed for 2010. Modified carryover basis rules took the place of the estate tax. Under these rules, the decedent’s heirs inherit the decedent’s basis in assets they received. A limited step up to fair market value (FMV) of $1.3 million was allowed for each estate as well as a $3 million adjustment for qualifying transfers of assets to a surviving spouse.
Tax Relief 2010 reinstated the federal estate tax for 2010-12 with a $5 million applicable exclusion equivalent amount (exemption) and a maximum estate tax rate of 35 percent. Estates of decedents who died in 2010 may choose which law they would like to apply. They can opt out of the estate tax and take the decedent’s basis for income tax purposes, or they can remain subject to the estate tax and receive a full step-up in basis. These alternatives should be closely reviewed for 2010 deaths to ensure the overall tax burden on the family is minimized.
The Present
Transfer Tax Planning
Gift Tax Planning - Tax Relief 2010 re-unified the estate and gift taxes for 2011-12 and increased the exemption to $5 million with a 35 percent gift tax rate. Individuals who previously used their former $1 million exemption can now make an additional $4 million of lifetime gifts during 2011-12 without paying gift tax. Wealthy individuals will want to take advantage of this opportunity as the law is currently slated to revert to a $1 million exemption in 2013 with a 55 percent tax rate.
Individuals should still consider utilizing other strategies such as Grantor Retained Annuity Trusts, Sales to Intentionally Defective Grantor Trusts, Charitable Lead Annuity Trusts, Qualified Personal Residence Trusts and Family Limited Partnerships.
Portability - Tax Relief 2010 allows a surviving spouse to use the deceased spouse’s unused exemption. This means for 2011-12, if both spouses die, and the first spouse did not use his/her full exemption, the second spouse can use his/her own exemption, plus what the first spouse did not use.
Generation Skipping Tax Planning - Prior law repealed the generation skipping transfer (GST) tax for 2010. Tax Relief 2010 reinstated the GST tax for 2010 with a $5 Million exemption. The exemption remains through 2012. Individuals should consider making gifts to trusts that will stay intact to provide financial support to multiple generations.
The Future
Two Year Sunset
We entered 2010 with uncertainty about the transfer tax rules. Although Tax Relief 2010 puts that uncertainty to rest for the near future, it does not provide any long-term answers, as the act sunsets at the end of 2012.