2010 Tax Relief Act with Respect to Transfer Tax
By Greenstein, Rogoff, Olsen & Co.
The 2010 Tax Relief Act provides temporary relief. Among other changes, it reduces estate, gift and generation-skipping transfer (GST) taxes for 2011 and 2012. It preserves estate tax repeal for 2010; estates wanting zero estate tax for 2010 must elect that option, along with the less favorable modified carryover basis rules that were set to apply for 2010. Otherwise, by default, the estate tax is revived for 2010, with a $5 million exemption, a top tax rate of 35%, and a step-up in basis. For estates of decedents dying after Dec. 31, 2010, a deceased spouse’s unused exemption may be shifted to the surviving spouse. However, these generous rules are temporary;—much harsher rules are slated to return after 2012.
1. Estate Tax
• Lower rate and higher exemption for 2011 and 2012
For estates of individuals dying in 2009, the top estate tax rate was 45% and there was a $3.5 million exemption. The top rate was originally intended to be 55% for estates of individuals dying after 2010, and the exemption- $1 million. But instead on December 17th 2010 the 2010 Tax Relief Act was sign and for 2011 and 2012 estate tax rate is lowered to 35%.It also increases the exemption for 2011 through 2012 to $5 million indexed for inflation in 2012.
• Sunset in 2013
All the generous rules mentioned above are temporary. Beginning 2013, if Congress fails to act, the Act will lapse and the estate tax will revert to what it would have been under prior law (i.e., $1 million applicable exclusion amount and 55 percent maximum estate and gift tax rate).
• Special tax saving choice for 2010
The 2010 Tax Relief Act allows estates of decedents who died in 2010 to elect either (a) estate tax based on $5 million exemption and 35% top rate and receiving a stepped- up income tax basis or (b) no estate taxes and modified carryover basis rules under the prior law.
• New portability feature
Portability allows the surviving spouse to elect to take advantage of the unused portion of the estate tax applicable exclusion (but not any used GST tax exemption) of their predeceased spouse, thereby, providing the spouse with a larger exclusion amount.
2. Gift Taxes
• Gift Tax changes
For gifts made in 2010, the applicable exclusion amount will remain $1 million and the maximum gift tax rate is 35%. For 2011 and 2012 gifts, the gift and estate tax are reunified and an overall $ 5 million exemption applies, while the rate stays the same. The sunset causes gifts in 2013 and later, however, to be subject to a lifetime gift tax exemption of $1 million and gift tax rate of 55%.
3. GST Tax
• GST Tax Changes
The GST tax is an additional tax on gifts and bequests to grandchildren when their parents are still alive. For gifts and deaths in 2010, the GST Tax rate is 0%, so no GST tax will be payable with respect to such transfer. The 2010 Tax Relief Act lowers GST taxes for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million and reducing the rate from 55% to 35%.
The key points discussed above include the following:
- The estate tax exclusion amount increases to $5 million per person for 2010 through 2012.
- The maximum estate and gift tax rate is reduced from the 55 percent maximum rate under prior law to a maximum estate and gift tax rate of 35 percent for 2011 and 2012.
- New portability feature provision is included, which allows surviving spouses to use any applicable exclusion amount that is not used by the first spouse to pass away.
- The GST exemption amount is increased to $5 million for 2010 through 2012.
- The Act sunsets at the end of 2012, thus making the foregoing changes temporary in nature.