Estate Tax Changes are Finally Here!
Corporate & Finance Alert
December 17, 2010
While the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Act”) makes significant changes in the estate and gift tax arena, more critically, it finally provides some certainty for tax advisors who over the past several months were left wondering if Congress would enact estate tax legislation before the end of 2010. The changes are highlighted as follows:
- Each individual will be entitled to a $5,000,0000 exemption from the federal estate, gift and generation-skipping transfer (“GST”) taxes ($10,000,000 per married couple).
- The maximum estate, gift and GST tax rate will be 35% (down from the 45% rate that existed in 2009).
- Exemption amount indexed for inflation beginning in 2012.
- For any decedent who dies in 2010, the executor can choose between: (1) having a decedent’s estate subject to estate tax with a $5,000,000 exemption, 35% tax rate, and “step-up” for assets owned at death to fair market value; or (2) no estate tax applying to the decedent’s estate, but with a modified carryover cost basis for assets that the decedent owned at death. Any modified carryover cost basis election is to be made on IRS Form 8939 which will be required for all 2010 estates with more than $1,300,000 of non-cash assets valued as of the date of death. The penalty for failure to report to the IRS on Form 8939 is $10,000 per failure. The deadline for making this election is nine (9) months from date of enactment of the Act.
- The estate, gift and GST taxes will be unified for gifts made after 2010 – so that one $5,000,000 per individual exemption applies for all three transfer taxes. Practically, this means that after 2010, an individual can gift up to $5,000,000 during life without paying gift tax to the IRS. When the individual dies, however, because the decedent utilized all of his $5,000,000 exemption with lifetime gifts, the decedent will have no federal estate tax exemption available at death.
- For decedents dying after 2010, a surviving spouse’s estate can “inherit” any estate exemption that the predeceased spouse did not utilize at his or her death. This is a significant change from prior law. The law now will allow for “portability” of the estate exemption between spouses. So if husband dies and utilizes $2,000,000 of his $5,000,000 estate exemption, the surviving spouse/wife will have a total estate exemption of $8,000,000 available at her death (i.e., her own $5,000,000 exemption plus $3,000,000 of the unused exemption at husband’s death). While portability also applies to any unused gift exemption of a deceased spouse (so it can pass to a surviving spouse), the Act does not appear to extend this to any unused GST tax exemption.
- For any GST tax transfers made during 2010, the GST tax exemption is $5,000,000 with a 0% tax rate.
- No changes made to the annual gift exclusion for gifts of cash or other assets that can be made to any other individual free of tax – that amount remains at $13,000.
- Estate, gift and GST tax changes described above are effective through 2012 – what happens then is anyone’s guess!
For more information or assistance on the estate tax changes and what it means to you, please contact one of the following:
IRS Circular 230 Disclaimer: To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein. For more information on this disclaimer, please see the Gibbons website. (https://www.gibbonslaw.com/circular230/)