For all media inquiries,
please contact:
Michelle Birckhead
Director of Marketing & Business Development
973.530.2119
mbirckhead@csglaw.com

New 2010 Federal Law Makes Significant Changes to Federal Estate, Gift and Generation-Skipping Taxes

December 2010

After almost one year of uncertainty due to the temporary repeal of the federal estate and generation-skipping transfer (“GST”) taxes, Congress voted on December 16, 2010 to approve the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “2010 Tax Relief Act”), which was signed into law by President Obama on December 17.

Included in the income tax provisions of the 2010 Tax Relief Act are a two-year extension of the 2001 income tax and capital gains tax rates, and a one-year decrease in the Social Security withholding tax on wages and self-employment.

The provisions of the 2010 Tax Relief Act that relate to the federal estate, gift and GST taxes are as follows:

  • The estate tax exemption amount will increase to $5,000,000 per individual and $10,000,000 per married couple for 2011 and 2012, and is indexed for inflation after 2011. The top tax rate for estates in excess of the exemption amount will decrease to 35%.
  • For gifts made in 2011 and 2012, the gift tax is reunified with the estate tax, meaning that an individual's $5,000,000 exemption ($10,000,000 for a married couple) may be used for gifts during life or for assets passing upon death. Thus, individuals who have already fully used the current $1,000,000 lifetime gift tax exemption will now have another $4,000,000 of exemption available. Lifetime gifts over $5,000,000 will be subject to tax at 35%.
  • There will also be a $5,000,000 GST exemption for 2010, 2011 and 2012. GST gifts above $5,000,000 made in 2010 will not be subject to GST tax (but will be subject to gift tax if they exceed the $1,000,000 gift tax exemption). GST gifts above $5,000,000 in 2011 and 2012 will be subject to GST tax at 35%.
  • For 2011 and 2012, a deceased spouse's estate may transfer any unused federal estate and gift tax exemption to the surviving spouse (called “portability”). To illustrate, if a husband dies survived by his wife, and the husband's estate utilized only $3,000,000 of his $5,000,000 exemption, upon the wife's subsequent death her estate will have a combined federal estate tax exemption of $7,000,000 ($2,000,000 of the husband's unused exemption plus the wife's $5,000,000 exemption), which can be used to pass assets free from the federal estate tax. Portability must be affirmatively elected by the first spouse's executor on a federal estate tax return filed for the first spouse's estate. Note that there is no portability of the GST exemption.
  • Estates of decedents who died in 2010 and before enactment of the 2010 Tax Relief Act:
    • May elect to either have (1) the federal estate tax (with a $5,000,000 exemption and 35% top rate) and a stepped-up income tax basis apply to estate assets, or (2) the federal estate tax not apply but estate assets will have a carry-over basis (although a $3,000,000 basis step-up for assets passing to a surviving spouse and a $1,300,000 basis step-up for assets passing to other beneficiaries can be applied).
    • Have nine months from the date of enactment of the new law to file any necessary federal estate tax return. Beneficiaries of 2010 estates have nine months from the date of enactment to make a qualified disclaimer of estate assets.

 The good news is that the $5,000,000 federal estate, gift and GST exemptions, together with portability for the unified estate and gift tax exemption, mean that these taxes will apply to far fewer taxpayers than in the past. In addition, the 2010 Tax Relief Act did not include prior proposals to require a 10-year minimum term for grantor retained annuity trusts (GRATs) or to restrict how interests in family-controlled businesses and other entities are valued. Given the historically low interest rates that are currently in effect, GRATs remain a very attractive estate planning tool.

The bad news is that the 2010 Tax Relief Act and its provisions are temporary through 2012 only, and it is not yet known if they will become permanent at that time or if additional changes will then be made. Thus, there will continue to be uncertainty in planning for federal estate, gift and GST taxes over the next two years.

It should be noted that although the federal tax law has now been temporarily revised, New Jersey continues to have an estate tax exemption of only $675,000, while New York’s exemption is $1,000,000, with no portability for either. Planning continues to be needed in order to minimize or avoid these state taxes.

The following chart summarizes the changes made by the new federal tax law:

 

2009

2010

2011

Estate tax exemption

$3,500,000

May elect $5,000,000 or no federal estate tax

$5,000,000 (plus portability)

Lifetime gift tax exemption

$1,000,000

$1,000,000

$5,000,000 (plus portability)

GST tax exemption

$3,500,000

$5,000,000

$5,000,000

Maximum estate, gift and GST tax rates

45%

35% (but 0% GST tax in 2010)

35%

Basis adjustment upon death

For all of the decedent's assets

May elect for (i) all assets or (ii) allocate $3,000,000 increase to spouse and $1,300,000 increase to others

For all of the decedent's assets

Please contact your estate planning attorney at Wolff & Samson PC (see below) if you have questions or would like more information.

Tax, Trusts and Estates Department at Wolff & Samson PC:

David L. Schlossberg
Member of the Firm
Phone (973) 530-2010
Email dschlossberg@wolffsamson.com

Sean M. Aylward
Member of the Firm
Phone (973) 530-2105
Email saylward@wolffsamson.com

Roxanna E. Hammett
Member of the Firm
Phone (973) 530-2039
Email rhammett@wolffsamson.com

Carl B. Levy
Of Counsel
Phone (973) 530-2035
Email clevy@wolffsamson.com

Shannon L. Keim
Associate
Phone (973) 530-2084
Email skeim@wolffsamson.com

Farah N. Ansari
Associate
Phone (973) 530-2044
Email fansari@wolffsamson.com