Services
Services Starting a New Business CFO Consulting & Making a Profit QuickBooks Training Accounting Services Bookkeeping Services Speaking Engagements Tax Preparation & Audit representationEstate Tax Updates
The new law includes favorable estate tax provisions for individuals who died in 2010, as well as those who die in 2011 and 2012. Here is a brief summary.
- $5 Million Estate Tax Exemption and 35% Rate. For estates of individuals who die in 2010-2012, the Act establishes a $5 million federal estate tax exemption with the 2012 amount indexed for inflation. Big estates are taxed at 35% above the $5 million threshold. (We'll have more on special rules for estates of individuals who died in 2010 later.)
- Unused Estate Tax Exemption Can Be Left to Surviving Spouse. For the first time, married individuals who don't use up their estate tax exemptions will be able to pass along unused amounts to surviving spouses. In other words, unused exemptions of individuals who die in 2011 or 2012 (but not 2010) will be "portable." The ability to pass along unused estate tax exemptions to surviving spouses is a very favorable development. It allows both spouses' exemptions to be utilized without having to set up a credit shelter trust or engage in other tax planning maneuvers—as long as they both die in 2011 or 2012. Unfortunately, this new portability rule sunsets after 2012, so it won't help decedents who die after 2012. Also, the portability rules do not apply to the generation-skipping transfer tax exemption. Thus, trusts may still be needed in certain situations.
- Unlimited Basis Step-ups for Inherited Assets. For heirs of decedents who die in 2011 and beyond, the familiar rule that allows the federal income tax basis of inherited capital-gain assets (such as real estate and stock) to be stepped up to reflect fair market value on the date of death is reinstated. This favorable rule is also reinstated for decedents who died in 2010 unless the estate elects to instead use the modified carryover basis rule. (We'll have more on this election shortly.) With the restoration of the unlimited basis step-up rule, heirs won't owe any federal capital gains taxes on appreciation that occurs through the date of death—as long as that date is after 2010 or, for decedents who died in 2010, their estate doesn't elect to use the modified carryover basis rules.
- Estate and Gift Tax Exemptions and Rates Are Equalized. The Act sets the lifetime federal gift tax exemption for 2011 and 2012 at $5 million—with the 2012 amount indexed for inflation (ditto for the generation-skipping transfer tax exemption). Thus, the gift tax and estate tax exemptions are equalized for 2011 and 2012. This is a huge improvement over the previous $1 million gift tax exemption (which continues to apply for 2010). An unmarried person can now give away up to $5 million while alive without paying any gift tax, and a married couple can give away up to $10 million. (To the extent you dip into your gift tax exemption, your estate tax exemption is reduced dollar-for-dollar.) The tax rate on 2011 and 2012 gifts in excess of the $5 million exemption is 35%, same as the estate tax rate. Again, thanks to sunset provisions, the gift tax exclusion reverts to $1 million after 2012.
- Clarity for Estates of 2010 Decedents and 2010 Generation-skipping Transfers. The Act clarifies the estate tax treatment of estates of individuals who died in 2010 and the generation-skipping transfer (GST) tax treatment of generation-skipping gifts made in 2010, but it does so in a weird way. The new law reinstates both taxes for 2010 with $5 million exemptions for each. But, executors have the option of electing out of the estate tax for 2010 in accordance with the 2010 repeal. If executors elect out of estate tax, the aforementioned modified carryover basis rules apply to heirs for income tax basis purposes. So, heirs of large estates can wind up owing capital gains taxes on appreciation that occurs through the decedent's date of death, but there won't be any federal estate tax. If the election out is not made for an estate, the $5 million exemption applies for 2010, and the income tax basis of inherited assets equals FMV on the date of death. For 2010, the GST exemption is $5 million. However, the 2010 GST rate is deemed to be 0%, so there's no actual GST liability for 2010. Therefore, large generation-skipping gifts can be made in 2010, and only the gift tax will be owed (2010 gifts in excess of the $1 million gift tax exemption for that year are taxed at a flat 35% rate). The GST tax exemption is not subject to any portability, unlike the estate tax exclusion amount. Thus, up to $5 million of GST tax exemption may be allocated to transfers in trust in 2010 (depending on how much GST tax exemption was used by the transferor prior to 2010). Note: The $5 million GST tax exemption is available to an estate whether the executor of an estate for a decedent who died in 2010 chooses to be subject to estate tax or elects out of the estate tax and instead applies the modified carryover basis rules.