BIG Changes in the Estate and Gift Tax

On December 17, 2010, President Obama signed a bill that included significant changes to the estate and gift tax system. The bill also provided some clarity for the estates of persons who died in 2010.

The highlights of the bill include:

  • Retroactive application of the estate tax for people dying in 2010, with an estate exclusion amount of $5 million and a 35% tax rate on amounts in excess of that;
  • The option to “elect-out” of the estate tax system for the estates of people who died in 2010 and not pay any estate tax, on any size estate, in exchange for “carryover basis”;
  • For 2011 and 2012 an estate, gift and generation skipping exemption of $5 million per person or $10 million per married couple with a maximum tax rate of 35% for amounts in excess of that;
  • “Portability” of one spouse’s unused exclusion amount to the surviving spouse;
  • Provides for a full “step-up” in basis for assets included in the estate of a decedent dying in 2011 and 2012;

All provisions of the bill expire, or “sunset” on December 31, 2012. What the law will look like after that date is anyone’s guess. Given the inaction by Congress to address this issue before the last law expired at the end of 2009, it is entirely possible that we will not see any action on this tax until after the 2012 presidential election.

What does the new law mean for you? It means that you should contact your estate planning attorney, or hire one, to take a look at the planning you have done (or not done) in the past. For many folks the next two years could be a tremendous opportunity to transfer property to their heirs in a very tax efcient manner. Items that might have been difcult to transfer in the past such as undeveloped land; business interests, collections (jewelry, art, coins, Beany Babies, etc.), vacation properties and other non-productive assets can be transferred to heirs at no gift tax cost if they are worth less than $5 million (or $10 million for married couples).

In the columns ahead, I will be describing many ways to take advantage of these new rules, but like they say “hurry in…time is limited” – and in this case it is literally true.