On December 16, 2010, the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” was passed by the Senate and House, and the President signed the bill on December 17. There are a lot of provisions dealing with income taxes which I won’t be mentioning. Instead, this column focuses on the new estate and gift tax provisions.
The federal estate tax sections in the new law include the following features:
The basic exemption from estate tax will be $5 million per person, and $10 million for a married couple. For any assets beyond the basic exemption amount, the top estate tax rate will be 35%.
Unlike the previous law (under which the exemption was individual), the new law will give a surviving spouse the full $10 million double exemption – but only if, when the first spouse dies (in 2011 or 2012) an estate tax return is filed, and on that return the Executor informs the IRS that any unused portion of the basic exemption will be carried over to the estate of the surviving spouse.
This law leaves a big unanswered question: if Spouse #1 dies in 2012 while this new law is in effect and the Executor claims the carry-over exemption, but Spouse #2 dies later (in 2013 or after) when this law is no longer effective, will the double exemption still be available to the second-to-die? No answer is provided in the new law, which points to its biggest flaw: it is only legally valid for a short time period.
The new law will be effective from January 1, 2011 to December 31, 2012 – in other words, it is a temporary change which fails to give us any long-range planning capabilities. For those who hope to live longer than the next two years (a lot of people), you must continue to assume the worst. The worst is that in December 2012 Congress either will fail to pass another extension or will pass another short-term extension. If they fail to pass an extension then, estate tax rates will soar and exemptions will dive.
The federal gift tax exemption will again be calibrated to the estate tax exemption. From years 2001 to 2010 the gift tax exemption was frozen at $1 million even when the estate tax exemption went up to $3.5 million. Under the new law, during 2011 and 2012 the gift tax lifetime exemption will be $5 million per individual, and gifts above that amount will cause a gift tax at 35%. These are the highest exemptions and the lowest rates in several generations.
To use the estate tax exemption, an individual must die. There will be few volunteers. But the gift tax exemption is available without the necessity of death. Will these new exemptions prompt a large transfer of wealth (by gift) from older parents to adult children during 2011-2012? Once the gift is given and the exemption is used, the wealth is transferred tax-free. Even if the exemption is not renewed in 2013, the parent’s estate will have been reduced in size, tax-free, leaving far less exposed to any higher estate tax we might see in 2013.
Congress also put two other items into the law that may affect your estate planning. They are:
1. If you donate land for conservation purposes, capital gain tax is adjusted or eliminated. This change is temporary through December 31, 2011.
2. If you make distributions from an IRA to a charity, there will be no income tax on the withdrawal. This is valid for donations in the 2010 tax year (but applies for distributions made up until February 1, 2011).
Paul Premack is a Certified Elder Law Attorney and a Five Star Wealth Manager (Texas Monthly Magazine 2009-2013) practicing estate planning and probate law in San Antonio.
Original Publication: San Antonio Express News, December 24, 2010