The federal estate tax disappeared in 2010, and was scheduled to reappear on January 1 2011, with a $1 million exemption amount per person and a top tax rate of 55%. However, the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (the Tax Relief Act) changed the landscape of estate, gift and generation-skipping transfer (GST) taxes. Under the Tax Relief Act, the federal estate tax comes back to life in 2011, but it is now imposed at the top tax rate of 35% of the estate's value after the first $5 million. This is a $4 million increase in the exemption amount.
The Tax Relief Act broadly changes the estate, gift and GST tax rules for 2010, 2011 and 2012, and then permits the old 2000 law to return in 2013. Without further legislative action, we are still scheduled to return to a 55% top estate and gift tax rate, a flat 55% GST tax rate, a $1million estate and gift tax exemption amount and a $1 million GST exemption amount (indexed for inflation). Thus, there is a two-year window during which certain estate planning opportunities will exist. In the interim, if these new changes become permanent, they will dramatically change the way in which estate planning is conducted.
Some of the key features of the Tax Relief Act include the following: (1) retroactively increase the estate exemption amount to $5 million for decedent’s dying in 2010 – 2012; (2) retroactively reinstate the step-up basis rules for 2010 and beyond; (3) reunify the estate and gift taxes, so that the gift tax exemption amount goes to $5 million starting in 2011; (4) retroactively allow a $5 million GST exemption amount for transfers in 2010, as well as for transfers in 2011 and 2012; (5) permit the executor of the estate of a 2010 decedent to elect not to have the estate tax apply, and instead to have the estate subject to the carryover basis rules of the 2001 law; (6) index the estate tax, gift tax and GST tax exemption amounts after 2011; (7) permit the executor of a estate of a spouse who dies in 2011 and 2012 to elect to pass to the surviving spouse the deceased spouse’s unused estate and gift exemption amount; and (8) postpone the sunset of the 2001 tax rules until January 1, 2013.
