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Tax Alert – Federal Estate & Gift Tax Legislation

On Friday December 17, 2010, President Obama signed into effect H.R. 4853, “The Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010” (the Tax Relief Act of 2010 or “TRA 2010”). TRA 2010 extends the Economic Growth and Tax Relief Reconciliation Act of 2001 (the EGTRAA) along with providing certain amendments. TRA 2010 specifically amends the section on estate and gift tax provisions under the EGTRRA. This following is a general summary of this temporary Estate Tax and Gift Tax law pursuant to the recent legislation.

The Federal Estate Tax

• Two-year extension of Federal Estate Tax
  • $5 million Federal Estate Tax Exemption ($10 million for couples) and a 35% rate of taxation applicable to decedents dying after 2010. For decedents dying in 2010, the Executor of an Estate will have the option to elect whether to apply the modified carry-over basis rules for capital assets or to apply the Federal Estate Tax rules pursuant to the TRA 2010. Please note that the “State” Estate Tax programs remain unchanged. Many States still have the State Estate Tax which has a far lower threshold for taxation than $5 million.
• For those who died in 2010, their Estate representative [Executor or Administrator] should contact their Attorney to discuss the Estate Tax filing.
  • Notably, there are extensions, under TRA 2010, for 2010 Estate Tax returns or Carry-Over Basis elections due to this new legislation.
• Two-year extension of the tax-free IRA/charitable distribution.

Portability

The executor of a deceased spouse’s Estate may transfer any unused Exemption to the surviving spouse with regard to the Federal Estate Tax and with regard to the Lifetime Gift Tax Exclusion amount by making such election on the Estate Tax Return. Only the unused Exemption/Exclusion of the “last deceased spouse” may be used. The TRA 2010 thus obviously is anticipating subsequent marriages.

The Gift Tax

• $1 million Lifetime Gift Tax Exclusion for 2010
• $5 million Unified Gift Tax Credit beginning in 2011

This means that as of 2011, individuals will have the ability to make gifts of $5 million ($10 million per couple). This is an extremely important new planning opportunity with regard to leveraging lifetime gift transfers, planning with Life Insurance, and many other Estate Tax planning strategies for the high net worth individual(s).

Generation Skipping Tax

• $5 million Generation Skipping Tax (GST) exemption is $5 million as of 2010. The applicable rate of taxation is 35%.

The “Sunset Provision” – the Temporary Status

• TRA 2010 amends EGTRRA and extends it for two years. If Congress does not again amend and/or extend Bush’s 2001 Tax Act as of 2013, then the Federal Estate Tax Exemption reverts back to $1 million with a taxable rate of up to 55%, etc., etc.

OPPORTUNITIES ABOUND!

• Take advantage of the increased Gift Tax Exclusion and explore gifting strategies beginning in 2011.
• Consider planning with life insurance – Irrevocable Trusts (for life insurance purposes) can hold policies having larger-than-ever premiums.
• Pre-fund Irrevocable Trusts (for life insurance purposes) for future premium payments.
• Accelerate Generation Skipping Tax Trust planning.
• Consider planning with Grantor Retained Annuity Trusts (GRATS). GRATS allow transfers of future appreciation without incurring gift taxes. The anticipated limitation to a ten-year term for the GRAT was not included in TRA 2010.
• Consider transfers using valuation discounts. A Family Limited Partnership (an “FLP”) transfers assets at a discounted value (due to lack of control/marketability) to a “limited partner” or “non-managing member.” The anticipated legislative curtailment of this strategy was also not included in TRA 2010.
• Review existing Estate Tax Planning

REMEMBER, this is only a two-year program. Use it, or lose it!