June 18, 2014

Estate and Gift Taxes Fixed — For Now


By Douglas Cushing

December 2010

Congress has finally addressed the pending return to the 2001 rules on federal gift and estate taxes, with a very significant change. The Tax Relief/Job Creation Act of 2010 renewed (retroactive to January 1, 2010) a federal gift and estate tax, while boosting the exempt amount and lowering the rates — but only for two years!

The new exempt amount is $5 million per person and the new tax rate is 35 percent. This increases the amount a married couple can pass without an estate tax to $10 million, and even if a tax is due, the rate is cut by 10 percent. These changes are applicable to anyone dying through December 31, 2012; thus, two years from now we may again face the quandary of what Congress will do with federal gift and estate taxes. For a death occurring in 2010 (when the estate and gift tax had theoretically disappeared), an estate may be submitted to the new tax regimen or be treated as if no tax is imposed during this calendar year.

That elective right for 2010 deaths will require significant financial and tax forecasting because there is only limited-basis step-up on assets if one elects the "no tax" option. Applying carryover-basis rules to transferred asset values in excess of $1.3 million (the allowed step-up limit) plus $3 million for a spouse may lead to higher capital gains taxes in future years, so the "no tax" election is not an automatic choice.

One new addition to the mix is the right for a married couple to truly claim a $10 million exemption, even if the estate of the spouse who dies first is less than $5 million, or if no exemption is claimed at all due to a marital deduction. The portability right will again be an election that must be made (and may be little tested) in the next two years because only if both deaths occur before the end of 2012 will estate planners and families be concerned. It is likely to be a right that will be carried on no matter what the future 2012 legislation may include.

What should you be doing today? Consider the next two years. Credit shelter language in existing wills that may lead to a higher funding than desired should be reviewed. If the total estate value is in excess of $10 million, current gifts remain desirable. Transfers to grandchildren or grandchildren trusts can be optimized in 2010 because no generation-skipping taxes are imposed this year; in general, take a look at asset values and family plans to make sure they still meet your goals.

Congress has provided new elections that may add more complicated choices, but at least we are not reverting to the 2001 system. Most important, the tax planning must be only a part of the equation, because the family planning and business-succession planning are the real keys to making your estate-planning decisions. Even if immediate 2010 planning is not required, take a look at your existing plan, and any steps under consideration, and be sure of what you want for the next two years.

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