The California Legal Blog

Generally, the estate and gift tax provisions of the 2010 Tax Act are very favorable to taxpayers because of the substantial increase in the applicable exclusion amount, to $5 million, and the lower maximum estate and gift tax rate of 35 percent. The Act also addresses several technical estate, gift and GST tax issues in a manner that is favorable to taxpayers (e.g., the impact of the lapse of the estate tax, including the application of basis rules, on decedents passing away during 2010).

The GST exemption in 2011 and 2012 will be $5 million – equal to the exclusion used for estate tax purposes.  The GST tax rate for transfers made after 2010 is equal to the highest estate and gift tax rate in effect for such year – 35 percent for 2011 and 2012.  In 2010, the GST tax will apply, but the tax rate for transfers made in 2010 will be zero percent.  The GST exemption will be $5 million.

The Act also extends the following GST modifications enacted as part of EGTRRA:

• The GST tax exemption will be allocated automatically to transfers to GST trusts made during life that are “indirect skips.”  An individual making direct or certain indirect skips may elect out of the allocation rules.  An “indirect skip” is a transfer that has an intermediary step before reaching the “skip person.”  The “skip person” is one that is two or more generations below that of the person making the transfer.
• Under certain conditions, the GST tax exemption can be allocated retroactively.
• Those inadvertently failing to make timely elections to allocate the GST exemption will have the opportunity to seek relief from Treasury.
• A “qualified severance” of a trust into two or more trusts, under the governing instrument or local law, will be respected for GST purposes.
• The value of property to be used for determining the inclusion ratio is the property’s finally determined gift tax value or estate tax value.
• Substantial compliance with the statutory and regulatory requirements for allocating the GST exemption will suffice to establish that the GST exemption is allocated to a particular transfer or trust.

Temporary Fix

The Act is a temporary fix, which sunsets on December 31, 2012, immediately after the next election cycle.  It is impossible to predict whether it will be extended in either its current or some modified form, especially given the fact that it is a hot button issue with both major political parties.  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).

Contact our Tax Planning Attorney in Los Angeles today to review your estate plan.

Continue reading blog series:

Additional Observations on the Gift Tax, State Estate Taxes and the Portability Provision