Summary of The 2010 Tax Act

To summarize, the 2010 Tax Act makes significant estate and gift tax changes.  Almost every estate plan needs to be rewritten immediately.  The key points discussed above in the blog series include the following:

  • The estate tax exclusion amount increase to $5 million per person for 2010 through 2012.
  • The gift tax is reunified with the estate tax, and up to $5 million in lifetime gifts will be exempt (over and above the annual gift tax exclusion of $13,000 per donor for every donee each year).  Taxable gifts would be taxed at a top rate of 35 percent.  One would certainly have to make a very large gift to fall into the taxable range.
  • The maximum estate and gift tax rate is reduced from the 55 percent maximum rate under prior law to a maximum estate and gift tax rate of 35 percent for 2011 and 2012.
  • A “portability” provision is included, which allows surviving spouses to use any applicable exclusion amount that is not used by the first spouse to pass away.  This is not only true of very large estates, but also of those smaller estate plans that were drafted when the exemption was smaller and credit shelter trusts and outright bequests were drafted with maximum language.  The net result when such documents are interpreted under the new rules would be to pass entire estates into credit shelter trusts and not provide for other beneficiaries, perhaps not even for spouses.
  • The GST exemption amount is increased to $5 million for 2010 through 2012.
  • The Act sunsets at the end of 2012, thus making the foregoing changes temporary in nature.

As always, we recommend that clients review their estate plans periodically and/or whenever a significant life event occurs (e.g., birth of a child, death of a spouse, purchase of new home, etc.).

For clients with substantial amounts of wealth and with closely held businesses, we highly recommend that such clients consider using lifetime gifts to take advantage of the current $5 million lifetime gift tax applicable exclusion amount, which will expire absent further Congressional action at the end of 2012.

As more becomes known about this Act, we will be available to discuss it further.  If we can be of assistance to you in the area of income tax or estate/gift tax planning, or, if you have any questions or wish to discuss your estate plan in light of the Act, please do not hesitate to contact us.

Please call our office at (818) 501-5800 at your earliest convenience, and we will gladly schedule time to meet with you and review your estate planning documents.  In some cases, no changes will be required.  In others, we will recommend changes.  We cannot know, in advance, whether your documents will require changes to best take advantage of the current state of the estate tax law until we have a chance to review your documents with you.

Nonetheless, we strongly believe that it is important that your estate planning documents produce the result you want.

Start reading from the beginning of this blog series on the 2010 Tax Act:

Important Estate Tax Aspects of the 2010 Tax Act (the “Act”)

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