Finally a New Tax Law (For Now)

The long-awaited legislation concerning the estate, gift, and generation-skipping transfer taxes has been passed by both houses of Congress, and signed into law by the President. The legislation is known as the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Here is a brief summary of the changes made by the legislation and their potential impact on estate planning. Note that all of these changes expire on December 31, 2012!

Estate Tax

• The act establishes a $5 million estate tax exemption and a maximum estate tax rate of 35 percent for decedents dying after January 1, 2010.
   
• However, the executor of an estate of a decedent who died during 2010 may elect to choose between this new law, which includes a step-up in basis in property acquired from the decedent for income tax purposes, or no estate tax with a carryover basis.

Gift Tax

•  Effective January 1, 2011, the gift tax exemption is increased to $5 million with a gift tax rate of 35 percent. The annual exclusion for gift tax purposes will remain at $13,000.
   
• The $1 million exemption remains for gifts made in 2010.

Generation-Skipping Transfer (GST) Tax 

•  The act establishes a $5 million GST tax exemption and a GST tax rate of 35 percent for gifts made and decedents dying after January 1, 2010.
   
• However, transfers made in 2010 will be subject to a zero GST tax rate. This means that gifts made in 2010 to grandchildren outright or in trust will incur no current GST tax. In addition, future distributions to the grandchild from such a trust created in 2010 can also be made free of GST tax. As was the case prior to this act, distributions from a nonexempt GST trust in 2010 can still be made without incurring a GST tax.

Portability 

• Effective for decedents dying after January 1, 2011, the executor of a deceased spouse's estate can elect to transfer any unused estate tax exemption to the surviving spouse.

Income Tax Provisions

• The act extends the lower individual income tax rates, including the 15 percent rate on long-term capital gains and qualified dividends, and provides AMT "relief."
   
• Effective January 1, 2010, individuals who have attained age 70½ may transfer up to $100,000 per year directly from an IRA to a public charity (an "IRA charitable rollover"). These transfers will qualify as meeting minimum distribution requirements for the year in which they are donated, and will not be included in the individual's gross income for federal income tax purposes. Any transfers made in January 2011 may be treated as made in 2010.
   
• The AMT "relief" and IRA charitable rollover provisions expire on December 31, 2011.

Careful analysis of your family's situation, including assets and goals, as well as taxes, is important. If you have questions about whether or how these changes impact your estate plan, please contact any member of the Trusts and Estates Practice Group.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

This article is republished with permission of Pepper Hamilton LLP. Further duplication without the permission of Pepper Hamilton LLP is prohibited. All rights reserved.

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