This article summarizes the estate and gift tax provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (hence the “2010 Estate Tax Relief Act”) that was signed into law by the President on December 17, 2010 (PL 111-312, 12/17/2010). However, for information on how you can adjust your estate plan to take advantage of this new law, contact Cody & Linde, PLLC today!

The section describes the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (hence the “2010 Estate Tax Relief Act”) that was signed into law by the President on December 17, 2010 (PL 111-312, 12/17/2010).  Under the law prior to the enactment of the 2010 Estate Tax Relief Act, the estate tax was scheduled to be repealed in 2010, and then to return in 2011 with an exemption of $1 million and graduated tax rates reaching a top rate of 55% on transfers over $3 million. The 2010 Estate Tax Relief Act reinstates the estate tax retroactively to the beginning of 2010 except where the personal representative/executor of the estate of a decedent dying in 2010 makes an election to opt out of the estate tax and be subject to the modified carryover basis rules instead.

For estates of decedents dying after 2009, the 2010 Estate Tax Relief Act provides that the estate tax exemption is $5 million (indexed for inflation after 2011) and the tax is imposed at a flat rate of 35% on all transfers exceeding the exemption amount.  The 2010 Estate Tax Relief Act provides that, for estates of decedents dying after Dec. 31, 2009, the maximum estate tax rate is 35%. This rate applies to taxable (remember there is an exemption of $5,000,000.00) transfers exceeding $500,000. (Code Sec. 2001(c) as amended by 2010 Tax Relief Act §302(a)(2)).
 
In conjunction with the repeal of the estate tax, pre-2010 Estate Tax Relief Act law would have provided “modified carryover basis” rules for property acquired from decedents dying in 2010. Under the modified carryover basis rules, the basis of property acquired from a decedent (increased by allocable dollar allowances) would have been the lesser of the property's adjusted basis in the hands of the decedent, or its fair market value on the date of the decedent's death. Except where the executor makes the special election described below, the 2010 Estate Tax Relief Act repeals the modified carryover basis rules retroactively to the beginning of 2010, and reinstates the stepped-up basis rules that applied before 2010, under which the basis of property acquired from a decedent is stepped up (or down) to the property's fair market value at the date of the decedent's death.

The 2010 Estate Tax Relief Act allows the personal representative/executor of the estate of a decedent dying in 2010 to elect not to be subject to the estate tax, and to have the modified carryover basis rules (instead of the stepped-up basis rules) apply in determining the basis of property acquired from the decedent. For estates of decedents dying after 2010, the 2010 Estate Tax Relief Act makes the estate tax exclusion (but not the GST exemption) portable between spouses, by allowing the estate of a surviving spouse to use any unused portion of the deceased spouse's exclusion, in addition to the surviving spouse's own exclusion.

Under pre-2010 Estate Tax Relief Act law, the generation-skipping transfer (GST) tax (I’m writing a separate article that describes what this tax is; basically it is a separate estate tax on transfers between a person and his or her grandchildren, and there is a separate exemption) was scheduled to be repealed in 2010. The 2010 Estate Tax Relief Act reinstates the GST tax retroactively to the beginning of 2010. For transfers in 2010 only, the tax rate for GST tax purposes is zero. The amount of the GST exemption is the same as the estate tax exemption ($5 million in 2010 and 2011, indexed for inflation after 2011). The GST exemption may be allocated to a trust created or funded in 2010.

For gifts made in 2010, the 2010 Estate Tax Relief Act leaves the gift tax exemption unchanged at $1 million. For gifts made after 2010, the 2010 Estate Tax Relief Act reunifies the gift tax exemption with the estate tax exemption ($5 million, indexed for inflation after 2011).  The 2010 Tax Relief Act also leaves unchanged the separate gift tax rate schedule that applies to gifts made in 2010, which reaches a top rate of 35% for gifts in excess of $500,000. For gifts made after 2010, the 2010 Estate Tax Relief Act reunifies the gift and estate tax rate schedule, which imposes tax at a flat rate of 35% on all transfers exceeding the exemption amount.

The 2010 Tax Relief Act provides that several estate and gift tax changes that were made by EGTRRA (Economic Growth and Tax Relief Reconciliation Act of 2001), which had been scheduled to cease on January 1, 2011, will now cease on January 1, 2013 instead. The 2010 Estate Tax Relief Act provides that the EGTRRA expiration date (as extended to January 1, 2013) also applies to the estate, gift, and GST tax changes made by the 2010 Tax Relief Act. This means that, after 2012, unless further legislation is enacted (1) the estate, gift, and GST exemption will be $1 million (the amount that, under pre-EGTRRA law, had been scheduled to apply in 2006 and later years); (2) the maximum estate and gift tax rate will be 55% on transfers in excess of $3 million; and (3) the rules allowing for the portability of the estate tax exclusion between spouses will not apply – ouch!