General Observations Regarding The 2010 Tax Act

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

Gift Taxes, GST and Misc Effects of The 2010 Tax Act

Gift Taxes

A “gift” is considered any transfer of property (real or personal) without receiving its full value in return.  For gifts made in 2010, the maximum gift tax rate is 35 percent and the applicable exclusion amount is $1 million. For gifts made in 2011 and 2012, the Tax Act limits the maximum gift tax rate to 35 percent and increases the applicable exclusion amount to $5 million.   As discussed below, this change provides an opportunity to move significant amounts of wealth free of estate and gift taxes.

Donors continue to be able to use the annual gift tax exclusion before having to use any part of their applicable exclusion amount. For 2010 and 2011, the annual exclusion amount is $13,000 per donee (married couples may continue to “split” their gift and may make combined gifts of $26,000 to each donee).

Generation Skipping Transfer (“GST”) Tax

The Act provides a $5 million GST exemption amount for 2010 (equal to the applicable exclusion amount for estate tax purposes) with a GST tax rate of zero percent for 2010. For transfers made after 2010, the GST tax rate would be equal to the highest estate and gift tax rate in effect for the year (35 percent for 2011 and 2012). The Act also extends certain technical provisions under prior law affecting the GST tax.

Miscellaneous

The Act also extends through 2012 several modifications enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

These include:

  • Expanding the availability of installment payments for estates with interests in qualified lending and finance business;
  • Clarifying installment payment provisions, requiring that only the stock of the holding companies, not that of operating subsidiaries be nonreadily tradable.  (Estates taking advantage of these two provisions would have to make the required payments over five years rather than fifteen);
  • Expanding the availability of estate tax installment payments by broadening the definition of an interest in a closely held business; and
  • Allowing a deduction of estate taxes paid to any state or the District of Columbia for decedents dying after December 31, 2009.

The Act further grants extensions of time for the filing of a tax return for certain estates, making tax payments, or making a disclaimer with respect to an interest of property passing by reason of the decedent’s death.  In the case of an estate for a decedent dying after December 31, 2009, and before the Act’s date of enactment, the due date for this compliance will be the date nine months after the date of enactment.

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

Continue reading blog series:

General Observations Regarding The 2010 Tax Act