Author: Dustin Wetton
On December 17, 2010, President Obama signed into law H.R. 4853, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This important tax extenders bill includes federal tax changes for individuals, businesses, and estates at all levels of income. One of the most important facets of the bill is the part concerning the estate and gift tax.
The deadline for revamping the estate and gift tax was the first of January, 2011. Thus, if no action was taken by Congress, the estate and gift tax laws would be restored to their 2001 levels. If that would occur, the amount that is exempt from estate taxes would be $1 million, and the tax on the rest would be 55 percent. Thankfully though, Congress took action. In this recent legislation signed into law only 13 days before the deadline, congress provided temporary estate tax relief and a modification of the gift and generation-skipping transfer taxes.
To sum up the recent changes that affect the estate tax, the new law has a higher exemption and a lower tax rate. The new legislation sets the estate tax exemption at $5 million per person and $10 million per couple. Thus, if you are an individual, you will not be taxed on up to $5 million of your assets upon your death. Therefore you are able to actually give out to others the inheritance that you had planned for them. Also, there is a top tax rate of 35 percent for the estate, gift, and generation-skipping transfer taxes for two years, through 2012. Thus, if you are an individual with more than $5 million in assets at your death, then anything over the exemption amount will be taxed at a top rate of 35%. Lastly, the proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.
A new tool is granted for estates of decedents dying after December 31, 2010. Under current law, couples have to do complicated estate planning to claim their entire exemption. Yet now, under this new legislation, a couple is allowed to transfer any unused exemption to the surviving spouse without any need for a planning instrument to dictate otherwise. Thus, the first spouse to die can use an estate plan that takes little to no taxes out of their estate, while also protecting the surviving spouse from heavy taxes upon their death.
Lastly, the new bill once again reunifies the estate and gift taxes. Prior to the 2001 Bush tax cuts, the estate and gift taxes were unified, creating a single rate schedule for both. This was subject to repeal if Congress took no action. Luckily though, the recent bill unifies the estate and gift tax once again. The bill is effective for gifts made after December 31, 2010.
With all of the new changes taking place, it is a good idea to use the inspiration of Congress’ action to take action yourself. Check your estate plans to ensure that you are in line with recent changes and that the language in your will or trust allows you to take advantage of the beneficial changes that have just come into affect.
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