President Obama signed HR 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act), into law on December 17, 2010. Some key estate and gift tax provisions of the Act are summarized below.
Increase in Estate Tax Exemption Amount; Decrease in Maximum Rate
Under the terms of the Act, the estate tax exemption amount for decedents dying between Jan. 1, 2011 and Dec. 31, 2012 will be increased to $5,000,000 and the maximum federal estate tax rate will be reduced to 35%. Also, the Act provides that the $5,000,000 exemption amount is indexed for inflation.
Additionally, the Act provides that beneficiaries who acquire assets from decedents dying in 2011 and 2012 will be entitled to a step-up to fair market value in the basis of such assets, as was the case prior to 2010.
Portability of Unused Estate Tax Exemption Amount
The Act permits an executor to elect to transfer a deceased individual's unused estate tax exemption amount to the individual's spouse who, thereafter, may combine this unused amount with their own estate tax exemption amount. Thus, the Act allows an individual to combine their personal estate tax exemption amount with their deceased spouse's unused amount.
Choice of Applicable Law
In 2010, a decedent's estate may elect to apply the 2010 federal estate tax law under which there is no federal estate tax or they may elect to apply the federal estate tax law in effect for decedents dying in 2011.
Decrease in Maximum Federal Gift Tax Rate; Use of Estate Tax Exemption Amount During Life
Under the Act, the maximum gift tax rate is 35%. Additionally, the Act allows an individual to apply their entire estate tax exemption amount to lifetime gifts. In 2009, a donor could apply only $1,000,000 of the Donor's $3,500,000 estate tax exemption amount to gifts made during the Donor's lifetime. However, under the Act, a Donor may apply their entire $5,000,0000 estate tax exemption amount to lifetime gifts. This is a significant beneficial change in the law.
Increase in Generation-Skipping Transfer Tax Exemption Amount
Each individual is entitled to a generation-skipping transfer (GST) exemption amount which may be allocated to GST transfers made during the year. Historically, an individual's GST exemption amount was equal to the estate tax exemption amount applicable for that year. Since under the terms of the Act the estate tax exemption amount for 2011 and 2012 is $5,000,000, the GST exemption amount for those years will also be $5,000,000.
Items Not Included in Compromise
While recently introduced legislation would have required a minimum 10-year term for all grantor-retained annuity trusts (GRATs), no such requirement was included in the Act. Nonetheless, it is still possible that in the near future Congress could require a minimum term length for GRATs. Consequently, although it is not included in the Act, a taxpayer interested in establishing a GRAT with a short duration may consider acting sooner rather than later to ensure the availability of such a trust.
Similarly, while recently proposed legislation would reduce and/or eliminate the use of discounts in valuing equity interests in closely-held entities, the Act does not contain any such restrictions. However, once again, it is possible that such restrictions could be imposed by Congress in the near feature. A taxpayer considering selling, gifting or otherwise transferring an equity interest in a closely-held entity should consider consummating such a transfer as soon as possible prior to any potential Congressional action to limit the use of validation discounts.
Waller Lansden will continue to monitor developments related to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. For additional information, please contact Leigh Griffith, Richard Johnson, Mike Yopp or any other member of the Waller Lansden Tax practice at 800-487-6380.
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