On December 17, 2010, President Obama signed the above Act into law. The Act extends for two years the Bush Administration’s income tax rates and various relief provisions, many of which were enacted in the last few years as or part of the economic stimulus legislation, and temporarily reduces the payroll tax for one year. In addition, the Act makes changes to the estate and gift tax law for 2011 and 2012 thus providing significant opportunities for taxpayers to transfer assets tax free to succeeding generations. Although there is uncertainty on the continuation of the Estate and Gift Tax changes after 2012, an understanding of these provisions is relevant at this time for timely planning.
The Estate Tax and Generation Skipping Transfer Tax have been reinstated with both lower tax rates and larger exemptions than in the past while the Gift Tax remains at the same rate. For decedents dying in 2010, an election is available to choose a carryover basis in lieu of paying the reinstated estate tax. The Gift Tax exemption has been reunified with the Estate Tax exemption which creates significant opportunities for generational wealth transfers.
Retroactive Reinstatement of the Estate Tax with a Maximum Estate Tax Rate of 35% and an Applicable Exclusion Amount of $5 Million: The estate tax was repealed for decedents dying in 2010. The repealed provisions, however, were scheduled to sunset at the end of 2010 restoring the applicable estate tax rates and exemption amounts to 2001 amounts. The Act retroactively reinstates the estate tax for decedents dying after December 31, 2009. However, estates of decedents dying in 2010 may elect a carryover basis on inherited assets in lieu of paying an estate tax on estates in excess of $5 million. Each client’s situation should be analyzed to determine the best solution. The estate tax applicable exclusion amount is $5 million under the Act and is indexed for inflation for decedents dying in calendar years after 2011, and with a maximum estate tax rate of 35%.