The new tax law retroactively reinstates the estate tax to January 1, 2010 and provides an enhanced exemption of $5 million and a lowered tax rate of 35% through 2012. The so-called "step-up in basis rule," which permits the income tax basis of non-income-with-respect-to-a-decedent property to be adjusted to fair market value as of the date of death, is also retroactively reinstated and the modified carryover basis regime repealed. However, for deaths occurring in 2010, the executor of the estate may elect out of these new rules and instead apply the zero estate tax rate and modified carryover basis rules that previously applied. For 2010 estates smaller than $5 million, the retroactive extension of the estate tax should be beneficial because of the full step-up in tax basis provision. For very large 2010 estates, electing out of the estate tax and becoming subject to the modified carryover basis regime is probably best. Careful analysis is necessary to decide which rules to follow for 2010 estates greater than $5 million and less than perhaps $40 million.
The lifetime gift tax exemption remains at $1 million for 2010 but is then re-unified with the estate tax exemption of $5 million beginning in 2011. The GST exemption amount for 2010 through 2012 is increased to $5 million but the tax rate remains at 0% for 2010, increasing to 35% in 2011 and 2012.
A 2010 estate tax return (Form 706) is now required for gross estates above $5 million. The normal due date of 9 months following the date of death has been extended to be no earlier than 9 months following the date of enactment, for deaths occurring January 1, 2010 through December 17, 2010. If the executor elects out of the estate tax for 2010, then the modified carryover basis disclosure (Form 8939) must be filed by that date.
A major change in the new law is the so-called "portability" of the estate tax (and gift tax by reason of "unification") exemption between spouses, for deaths occurring in 2011 and 2012. However, the GST exemption is not portable. The deceased spouse's estate must file an estate tax return to claim the portability benefit. Portability helps to solve the vexing problem of wasting a portion of the estate tax exemption if one spouse does not separately own property worth at least as much as the estate exemption. Any unused estate exemption of the first spouse to die may be carried over to the surviving spouse. In the case of multiple spouses, only the unused exemption of the last spouse to die may be used. A person cannot accumulate unused exemptions from multiple spouses who die! Does portability eliminate the need for credit-shelter or family trusts? Such trusts might not be needed for federal estate tax in 2011 and 2012, but with multiple marriages and litigation in today's society, these trusts will still prove to be very useful even if not needed for federal estate tax planning. Also, this portability provision is only temporary and ends after 2012. The uncertainty surrounding the estate tax has not been solved by this new law, and you must still consider what the law might be after 2012 in your planning!
With the "reunification" of the gift and estate tax exemptions, taxpayers who have previously used up their $1 million lifetime gift tax exemption will be able to make significant new gifts in 2011 and 2012.
Estate tax planning provisions in your existing wills and trusts that rely on formula provisions to fund the credit shelter or family trust should be reviewed. The provisions were written when the exemption from estate tax was much smaller. For example, in 1999 the exemption was only $650,000; now it is $5 million through 2012. The increase in the federal exemption changes how the estate property will be inherited among your beneficiaries and may not reflect your intentions. Credit shelter trusts often put restrictions on how much the surviving spouse may benefit from the trust, and in some cases, may totally exclude the surviving spouse. The temporary change in law does not mean credit shelter trusts are no longer necessary, it means that you may wish to consider limiting how much goes into the credit shelter trust and/or to add provisions enabling your surviving spouse to more easily benefit from the trust.
Certain proposed adverse changes to estate planning techniques were not included in the new law. The proposal to require GRATs to have a 10-year minimum term (among other requirements) and the proposal to eliminate some valuation discount opportunities were not included.
Last minute 2010 transfer tax planning primarily concerns GST planning. Consider implementing before 2011 the following:
- Make direct-skip gifts to grandchildren or to a GST-trust for the exclusive benefit of grandchildren and further descendants. Be careful to avoid making gifts above the amount of your unused $1 million lifetime gift tax exclusion or else a gift tax of 35% will be incurred even though the GST tax rate is 0% in 2010.
- Make distributions to grandchildren from trusts that are not exempt from GST (zero-inclusion ratio).
The following table summarizes the transfer tax exemptions and rates for 2009 through 2013.
Year | 2009 | 2010 | 2011 | 2012 | 2013 |
Estate exemption | $3.5M | $5.0M | $5.0M | $5.0M* | $1.0M |
Estate tax rate | 45% | 35% | 35% | 35% | 55% |
Gift exemption | $1.0M | $1.0M | $5.0M | $5.0M* | $1.0M |
Gift tax rate | 45% | 35% | 35% | 35% | 55% |
Gift annual exclusion | $13K | $13K | $13K | $13K* | $13K* |
GST exemption | $3.5M | $5.0M | $5.0M | $5.0M* | $1.0M* |
GST tax rate | 45% | 0% | 35% | 35% | 55% |
* As indexed for inflation
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