Estate tax relief is substantial, but temporary

New provisions in the 2010 Tax Relief Act are substantially reducing estate, gift and generation-skipping (GST) taxes through December 31, 2012.

The rundown

The 2010 Tax Relief Act brought the estate tax back to life in 2011 and 2012 and is imposed at the top rate of 35 percent of the estate’s value after the first $5 million per individual.

At these new levels, a vast majority of estates (all but an estimated 3,500 nationwide in 2011) will not be subject to any federal estate tax. A 55 percent tax with a $1 million exemption would have resulted in about 43,540 taxable estates in 2011.  Here’s a bit of history: except for the temporary repeal of the estate tax in 2010, the estate tax rate has not been less than 45 percent since 1931.

The GST tax is an additional tax on gifts and bequests to grandchildren when their parents are still alive. The 2010 Tax Relief Act lowers GST taxes for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million and reducing the rate from 55 percent to 35 percent.

The new law also gave heirs of decedents who died in 2010 a choice of which estate tax rules to apply – 2010’s or 2011’s. This is important to note because although there was no estate tax in 2010, some inherited assets are subject to higher capital gains tax under the 2010 rules, which actually raises the tax burden for some heirs. Under the 2011 rules, heirs will be allowed to inherit assets with a $5 million exemption from both estate and GST and an unlimited step-up in the basis of assets to their current market value.  However, heirs of wealthy decedents may find it more beneficial to elect the 2010 law – limited step-up in the basis of assets and no estate tax.

A new portability feature has also been introduced. This means any exemption that remains unused as of the death of a spouse who dies after Dec. 31, 2010 and before Jan. 1, 2013 is generally available for use by the surviving spouse in addition to his or her own $5 million exemption for taxable transfers made during life or death. Previously, the exemption of the first spouse to die would be lost if not used.

These rules are temporary – ending on Dec. 31, 2012. In 2013, the top rate is slated to be 55 percent with the exemption at $1 million. Although it is possible, according to Trust & Estates, that current law will be changed and the baseline estate and gift tax assumptions outlined in the Obama Administration’s Budget Proposal, will prevail. Should this be the case, a $3.5 million estate tax exclusion amount beginning Jan. 1, 2013 would be applied.

At one point in time the gift and estate tax were unified, sharing a single exemption and were subject to the same rates. But it hasn’t been that way for a while. In 2010, the top gift tax rate was 35 percent and the exemption was $1 million. For gifts made after Dec. 31, 2010, the gift tax and estate tax are reunified and the overall $5 million exemption applies.

What do these changes mean to you?

This means there is a small window of opportunity to take advantage of these tax changes.

The time to assess your current estate plan is now.

We understand that estate and related gift planning is no small consideration and requires complete and thorough analysis. One important step in the estate and gift planning process is to determine the property you are willing to transfer out of your estate. This gift is not limited to cash or marketable securities and often will comprise little of each of these depending upon the composition of assets found in your estate. In addition to identifying the assets eligible for gifting, it is important to structure the transaction so the property or asset is protected from creditors.

It is also important to consider evaluating alternative transfers and their impact on your personal goals and tax savings. Keep in mind that you can take an asset and transfer it out into an entity – this could be an existing already-held company, a portfolio, or real estate.

Valuations play a major role during this process. Because of the $5 million extension, expiring portability and low values, the time to revamp your estate plan is now. When we are talking about transferring assets out of an estate, we are concerned about the value that we place on that asset. Low real estate values and interest rates are conducive to a low valuation. This fares well because we can ultimately transfer more asset for less value. All these factors benefit individuals looking to do estate planning.

For more information on these changes, contact H. Thomas Wagner, Jr., at 561-798-9988 or

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