New Estate & Gift Tax Legislation

On December 17^th new tax legislation was signed into law that provides federal estate and gift tax planning guidance for the next two years. All of the new provisions will once again “sunset” at the end of 2012, and 2013 will bring back the dreaded $1 million exemption and top estate tax rate of 55%.  (Maine, Massachusetts, New Hampshire, and Rhode Island state estate tax laws have not changed.) Some view this legislation as merely extending the current federal tax uncertainty for an additional two years.  We, however, see some opportunities in the new law.

Estate Tax

The estate tax is retroactively restored for decedents with dates of death in 2010 with a $5 million exemption and a full “step-up” in income tax basis to date of death value.  The top estate tax rate is 35% for 2010, 2011, and 2012.  The Executor may, however, opt out of estate tax and instead treat the estate as fully exempt from estate tax.  If the Executor makes such an election, the Executor will also forgo the step up in income tax basis and will instead be subject to partial allocation of “basis adjustment” rules. 

By way of review, under the law prior to December 17^th, for those who died in 2010 some inherited property was subject to a modified “carry-over” basis.  The executor of the estate was responsible for allocating “basis adjustment”.  The carried-over basis of an asset was subject to three adjustments:  an executor could increase the basis of inherited property by up to $1.3 million in the aggregate, unused losses further increased basis, and an executor could adjust the basis of “qualified spousal property” by an additional $3 million.  The Executor could choose which assets would receive basis allocation; there was no requirement that basis be allocated ratably. 

The filing due date for decedents who died after December 31, 2009 and before December 17, 2010, is extended to 9 months after December 17.

Some estate tax returns filed in 2010 may warrant amendment and some revised tax planning in light of the new law.  The current financial picture of the surviving spouse and the spouse’s own estate plan can affect directly decisions about the optimal tax reporting for a decedent’s estate.  You should contact your Pierce Atwood estate advisor for more information.

Generation Skipping Tax (GST)

GST exemption is $5 million for 2010.  The GST tax rate is 0% for 2010.  This allows GST tax-free transfers to grandchildren or more remote descendants (or to certain types of trusts for their benefit) before year end.  Gift tax would still be due on gifts in excess of $1 million in 2010.  GST tax returns in 2011 with a rate of 35% and an exemption of $5 million. 

Gift Tax

The gift tax exemption will be “reunified” so that the estate tax exemption and the gift tax exemption will be the same in 2011 ($5 million) and 2012.  The gift tax exemption will stay $1 million for 2010.  The annual gift tax exclusion of $13,000 per donee per year will not change for 2012.

The combined changes in the GST and Gift Tax Rules offer both opportunities and cautionary tales for 2010 donors.  If you are planning large gifts this year, consider delaying those gifts to 2011 if you want to take advantage of the higher exemption amount that will then be available. 

Consider distributions before year end from non-exempt GST trusts, thereby avoiding the potentially confiscatory GST tax applicable once again in 2011.

Consider making gifts directly to grandchildren in 2010 or to certain types of trusts for their benefit to take advantage of the current GST tax rate of 0%.

Portability of Unused Exemption Between Spouses

A surviving spouse can now utilize the unused exemption of his/her last deceased spouse if the deceased spouse died after 2010.  This portability must be affirmatively elected on the estate tax return of the deceased spouse. Portability applies only to estates of decedents dying after December 31, 2010.  Portability does not apply to unused GST exemption.

The new Portability Rules, while helping to avoid disastrous estate tax effects for those couples who previously failed to plan appropriately, are complex.  In some circumstances, the use of exemption trusts for married couples will still be appropriate for tax and non-tax reasons.  You should consultant your Pierce Atwood advisor for guidance. 

IRA Distributions to Charitable Recipients

The prior provision allowing annual tax free distributions to charity from an IRA account of up to $100,000.00 per taxpayer has been extended through December 31, 2011.  Charitable transfers made during January of 2011 can be treated as if made during 2010 for income tax and minimum required distribution purposes.    

In summary:

*The estate tax exemption, gift tax exemption and GST exemption will be indexed for inflation