We begin the New Year with temporary estate tax relief.  The key word is “temporary.”  Congress, at the last minute, finally has acted to modify the estate, gift and generation-skipping transfer taxes.  However, this modification of the estate, gift, and generation skipping transfer taxes will last only for two years, unless Congress passes a more permanent law.  If Congress does nothing, on January 1, 2013, the estate tax exemption will be reduced to $1,000,000.00 and the estate tax rate will increase to 55%.  Essentially, the last Congress has “punted” forward the sunset provisions of EGTRRA (the Economic Growth Tax Relief Reconciliation Act) for two years.  No one can predict what will happen then.  This newsletter will highlight the key elements of this temporary estate tax relief.

1.         First, the estate tax has returned.  However, it has returned with a much larger personal exemption of $5,000,000.00 and a lower 35% tax rate. 

2.         Second, the gift tax is reunified with the estate tax, so that everyone now also has a $5,000,000.00 lifetime gift tax exclusion amount and a 35% gift tax rate. 

3.         Third, the generation skipping transfer tax exemption will be Five Million Dollars ($5,000,000.00) in 2011, indexed for inflation beginning in 2012.  The GST tax rate for 2011 and 2012 will be 35%. 

4.         Fourth, there is now “portability” of the unused exemption between spouses.  This means that a husband and wife together essentially have a $10,000,000.00 exemption, the unused portion of which can pass between spouses without any special estate planning being required.  In the past, we have often used two trusts, in husband and wife planning, to obtain such a doubling effect of the exemption amount.  However, such portability is assured only for two years and the availability of this portable exclusion amount requires an election to be made on a timely filed estate tax return.  Moreover, the provision does not allow a surviving spouse to use the unused generation skipping transfer tax exemption of a predeceased spouse.  So, we likely will continue to recommend trust planning for many of our clients.

            What is the effect of this temporary estate tax relief on estate planning going forwardThe $5,000,000.00 gift exclusion amount and GST exemption beginning in 2011 provide an individual with the ability to make $5,000,000.00 in lifetime gifts to family members or others without having to pay gift taxes; and provide couples with the opportunity for making gifts of up to $10,000,000.00 without having to pay gift taxes.  This paves the way for immediate gift planning opportunities to reduce the value of your gross estate.  This can be done by giving simple gifts or by utilizing leveraging strategies such as gifts to grantor trusts and other techniques to effectively transfer far more than $10,000,000.00 out of your estate.  However, gifting strategies should consider the cost basis rules.  Let us know if we can assist you in the gift planning process.

          There still are several reasons for continuing to use bypass trusts at the first spouse’s death, such as asset protection and flexibility, which we will discuss in detail at our “Truth About Estate Planning” workshops throughout the upcoming year.

2 comments on “NEW ESTATE TAX LAW: EFFECTIVE JANUARY 1, 2011 – DECEMBER 31, 2012

  1. Hi,
    My mom passed away March 27, 2010. We were told that we needed to find out what the law would be in regards to claiming taxes this year on the amount given to us by one brother who bought us out. Do we need to claim the $30,000 that my brother gave us for our portion of my mom’s house, or is this considered a gift?

    Thank you,
    Gina Selga

  2. I would need to know more information in order to answer your question. I charge $150.00 for a 30 minute consultation. If you furnish me the necessary information, I should be able to answer your question in the allotted time.

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