Tax Relief Act of 2010 – Estate, Gift and GST Tax Provisions

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010 (the Act). Among the key points of the Act are several provisions addressing the expiring estate, gift and generation-skipping (GST) transfer tax provisions of current law.

Unification of the Transfer Taxes

In general, the Act sets the estate, gift and GST exemption at $5 million (indexed for inflation beginning in 2012) and sets the maximum tax rate at 35%. The exemption applies in 2010, except with respect to the gift tax, which remains at $1 million until January 1, 2011.

Estate Tax Provisions

The Act made several changes to the prior estate tax regime, which provided for no estate tax in 2010, but reverted to a $1 million exemption and a maximum tax rate of 55% for estates of decedents dying beginning on January 1, 2011.

• Estate Tax in 2010. The Act provides a default rule whereby the estate tax applies retroactively to estates of decedents dying in 2010. As discussed above, the exemption is $5 million and the maximum rate is 35%. However, executors of estates of decedents dying in 2010 may elect to have the modified carryover basis rules apply with respect to property acquired or passing from the decedent instead of the estate tax. The generation-skipping tax provisions of the Act will continue to apply to 2010 regardless of the election to opt out of the estate tax.
  
  
• Extension of Time to File. The estate tax return and payment of the estate tax is extended to no more than nine months from the date of enactment of the Act for estates of Decedents dying from January 1, 2010 to the day before the enactment of the Act. This due date also applies to the carryover basis report, if the estate opts out of the estate tax in favor of carryover basis regime of the prior law. The Act also extends the time for making qualified disclaimers of property to nine months after the date of enactment. This creates flexibility in planning in light of the changes introduced in the Act, but may conflict with state law statutes governing disclaimers, many of which refer to nine months after the transfer, a period which is likely to be shorter than that provided in the Act.
  
  
• Portability Under the Act. The executor of a deceased spouse's estate may transfer any unused estate exemption to the surviving spouse. In order to transfer the unused exemption, the executor of the deceased spouse's estate must file an estate tax return and make an election to allow the surviving spouse to utilize the unused exemption. Only the most recently deceased spouse's unused exemption may be used by the surviving spouse. Portability applies for the estate tax exemption and the gift tax exemption, but does not apply for the GST tax exemption.
  
  

Gift Tax Provisions

As noted above, beginning in 2011, the gift tax exemption is unified with the estate and GST tax at $5 million. The unification of the gift and estate tax regimes provides powerful new opportunities for transfer planning for wealthy individuals.

GST Tax Provisions

The GST Applicable Rate in 2010 is zero, which results in no GST tax on transfers in 2010. Beginning in 2011, there is a $5 million exemption (indexed for inflation beginning in 2012) and a maximum tax rate of 35%. As with the estate tax, the time to file a GST return is extended to no earlier than nine months after the date of enactment of the Act.

The zero tax in 2010 presents one-time planning opportunities for currently non-exempt generation-skipping trusts and for gifts to grandchildren or trusts for their benefit. Such opportunities will expire after December 31, 2010.

Sunset Provisions

The provisions of the Act are only a temporary repair, expiring on December 31, 2012. The Act provides no guidance for planning beyond 2012. If Congress does not address these issues again before December 31, 2012, we will find ourselves in the same uncharted waters as we did only a few days ago.

For more information about the new Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010, or if you have questions about how this new law may effect your current estate plan, please contact us.