Almost every estate plan in the United States needs to be rewritten immediately. Before the 2010 Tax Act, the federal estate tax was gradually reduced over several years and then eliminated for decedents dying in 2010. Prior law provided that the estate tax, with a maximum tax rate of 55 percent and a $1 million applicable exclusion amount, would be reinstated after 2010. Additional changes scheduled for years after 2010 affected the gift and generation- skipping transfer (“GST”) taxes.
The Act reinstates the estate tax for decedents dying during 2010, but at a significantly higher applicable exclusion amount of $5 million, and a lower maximum tax rate of 35 percent. The exemption will be indexed for inflation, beginning in 2012. This estate tax regime continues for decedents dying in 2011 and 2012. Unfortunately, this new regime is itself temporary and will sunset on December 31, 2012 and the prior estate tax regime, with a 55 percent maximum estate tax rate and a $1 million applicable exclusion amount, will be reinstated at that time. There is no guarantee that the rules will remain in place permanently. Among the range of possibilities is another complete repeal (highly unlikely) or a tightening of the rules. However, Congress has shown that it has a difficult time generating a consensus on tax issues, so the status quo could continue beyond the next two years.
The Act also eliminates the modified carryover basis rules for 2010 and replaces them with the stepped-up basis rules that had applied before 2010. Property with a stepped-up basis generally receives a basis equal to the property’s fair market value on the date of the decedent’s death. Under the modified carryover basis rules that applied during 2010 before the Act, executors could increase the basis of estate property only by a total of $1.3 million (plus an additional $3 million for assets passing to a surviving spouse, for a total increase of $4.3 million), with other estate property taking a carryover basis equal to the lesser of the decedent’s basis or the property’s fair market value on the decedent’s death.
Leave it to Congress to create a “ginormous” loophole, a historic rift in the entire time-space continuum through which several billionaires waltzed on their way out of this mortal coil, even while TSA agents were frisking, x-raying, and imaging elderly people boarding airplanes. The Act gives estates of decedents dying during 2010 the option to apply (1) the estate tax based on the new 35 percent top rate and $5 million applicable exclusion amount, with stepped-up basis, or (2) no estate tax and modified carryover basis rules under prior law.
The Act also provides for “portability” between spouses of the estate tax applicable exclusion amount for estates of decedents dying in 2011 and 2012 if both spouses die before 2013. Generally, portability allows surviving spouses to elect to take advantage of the unused portion of the estate tax applicable exclusion amount (but not any unused GST tax exemption) of their predeceased spouses, thereby providing surviving spouses with a larger exclusion amount. Special limits apply to decedents with multiple predeceased spouses. To preserve the first deceased spouse’s unused applicable exclusion amount, the executor for such spouse must file an estate tax return and make an election on such return, even if such an estate tax return would otherwise not be required.
Now is the time to take advantage of the increased exclusion amount. Contact our Estate Tax Planning Attorney in Los Angeles today.
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