The 2010 Tax Act was enacted effective December 17, 2010. Although the scope of the Tax Act is extensive, this article addresses the impact of certain limited portions of the Act on estate planning. Key features of the Tax Act include:
- The estate tax, which was repealed in 2010, has now been reinstated, effective as of January 1, 2010. The step-up in basis rules also have been reinstated.
- The executor of an individual who died in 2010 may elect not to be subject to estate tax and to have the pre-Tax Act modified carryover basis rules apply to the estate of the decedent
- The top estate tax rate has been reduced to 35% for 2010 through 2012.
- The gift tax rate is 35% through 2012, and the Generation-Skipping Transfer (“GST”) tax rate is 35% in 2011 and 2012.
- The estate tax applicable exclusion amount (now referred to as the “Basic Exclusion Amount”) has been increased to $5,000,000 for persons dying in 2010 through 2012. For persons dying in 2011 and 2012, the executor may elect to have the unused Basic Exclusion Amount of the decedent transferred to the surviving spouse by making an election on the decedent’s timely filed estate tax return.
- For 2011 and 2012, the gift tax exemption amount also has been increased to $5,000,000 per person. The GST exemption has been increased to $5,000,000 for 2010 through 2012.
- The time for filing 2010 estate tax returns, gift tax returns, GST tax returns, and carryover basis returns, the making of elections on those returns, and tax payments and disclaimers of interest passing in 2010 have been extended to nine months after the December 17, 2010 date of enactment.
As the foregoing illustrates, the fixes made by Congress in the 2010 Tax Act are only temporary. As a result, the Tax Act leaves long-term estate planning in a state of flux. The new rules are scheduled to disappear in two years, and the $5,000,000 exemption amount may once again become $1,000,000. On the other hand, the benefit of the $5,000,000 gift tax exemption (even though you may not want to use it all) makes current gifts very attractive. However, there are some potential pitfalls should the gift tax exemption amount be reduced in the future.
Theoretically, the new law should make estate planning easier for most individuals, but if you have more than $1,000,000, you cannot be certain that the law will not revert back to the old rules and put you in a taxable situation. For the executors of individuals who died in 2010, it will necessary to analyze whether it is more advantageous to take advantage of the rules established in the new Tax Act or to elect to be covered by the old rules under which the estate tax is no longer in existence and there is carryover basis with a limited basis step-up.
Tom Rink is the Chair of Strauss & Troy’s Tax Department. If you have questions or concerns, or if you would like to make an appointment to discuss the impact of the new law on your estate plan, please feel free to contact your Strauss & Troy attorney or Tom Rink (513-629-9490), for a review of your individual situation.
Notice: Pursuant to IRS Circular 230, this is to disclose that any advice contained herein concerning the tax treatment of an item of income, gain, loss, deduction, or credit, the existence of a taxable transfer of property or the value of property for federal tax purposes, is not intended or written to be used, and cannot be used by any person, for the purpose of avoiding any federal tax penalties that may be imposed on such person.