By: Anthony J. Enea, Esq. *
On December 17, 2010, President Obama signed into law "The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010" ("2010 Act"), (try saying that 10 times fast), which contains sweeping revisions to federal estate and gift tax laws. Although it will take several months for all of the provisions of the 2010 Act to be thoroughly reviewed and analyzed, one thing appears to be certain, the 2010 Act presents an unprecedented two year window to engage in significant estate and gift tax planning.
In summary, the following are the relevant federal estate and gift tax rules contained in the 2010 Act:
(a) For decedents dying in 2010, the executor of the estate may choose between (1) no federal estate tax pursuant to the prior repeal of the estate tax with the "modified carryover basis rules" which limits the step up in basis of the decedent's property for capital gains tax purposes to $1.3 million for heirs and $3 million for spouses, or (2) the new $5 million estate tax credit, with an unlimited step up in the cost basis for capital gains tax purposes on the property passing from the decedent's estate. The maximum federal estate tax rate is 35% if the new $5 million credit is chosen. The time to file the federal estate tax return for decedent's dying in 2010 has been extended to nine(9)months after the date of enactment of the 2010 Act ;
(b) For the year 2010, the lifetime gift tax credit remains at $1 million dollars with a maximum tax rate of 35%. Thus, no change was made;
(c) For the estates of decedent's dying in 2011 and 2012, the federal estate tax credit is increased to $5 million per person and $10 million for a married couple. The maximum tax rate is reduced to 35%. For the year 2012, the credit amount will be indexed for inflation. The estate tax credit under the new rules is now portable, thus, the executor of the estate of a decedent can transfer the unused portion of the decedent's estate tax exemption to the surviving spouse;
(d) Commencing on January 1, 2011 the gift tax credit is now re-unified with the estate tax credit with a $5 million gift tax credit per person being available and not $1 million as under the laws in effect for 2010. The 2001 Tax Act had "de-coupled" the estate and gift taxes. Thus, in 2011 and 2012 a single person can make a total of $5 million worth of taxable gifts without incurring a gift tax, and a married couple can gift a total of $10 million without incurring a gift tax. The maximum tax rate on gifts in excess of the credit amount remains at 35%.
For example, a married couple that has previously utilized each of their $1 million gift tax credits ($2 million total), now has the ability to give away an additional $4 million total per person ($8 million total per couple) in 2011 and 2012. In reality, if said married couple is gifting assets that can be discounted for lack of marketability and a minority interest discount, the value of the assets gifted can be significantly greater than the $8 million. I think it is safe to assume that a lot of gifting will occur in the next two years.
Although there is uncertainty as to whether the provisions of the 2010 Act will be extended beyond 2012, the new rules effectively shield the vast majority of Americans from any federal estate taxes during the next two years. Those financially concerned with estate taxes, i.e. the affluent and small business owners now have the opportunity to take significant steps to reduce their exposure to the potential for estate taxes in a material way. The use of complex trusts, such as Grantor Retained Annuity Trusts (GRATS), Intentionally Defective Grantor Trusts (IDGTS), Qualified Personal Residence Trusts (QPRTS), as well as Family Limited Partnership and Limited Liability Companies will be of great importance in taking advantage of the unprecedented opportunity that has presented itself.
It should be remembered that the New York Estate Tax Credit remains at $1 million per person. As with all things in life, advance planning is of critical importance.