2010 Tax Relief Act – Estate & Gift Tax Provisions

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Congress made several important estate and gift tax changes under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 Tax Relief Act”).

The new law reinstituted the estate tax after its one year abolition, but with many taxpayer-friendly changes. The federal estate tax and related provisions are among the most complex in the Tax Code. This article presents an overview of the provisions in the new law. Most estate planning documents need a careful review to determine changes need in light of these new provisions. For more details, please contact our office.

Estate tax rates. The Economic Growth and Tax Relief Reconciliation Act of 2001 (2001 Tax Act) repealed the federal estate tax for decedents dying in calendar year 2010. After 2010, pre-2001 estate tax provisions were scheduled to return. The 2010 Tax Relief Act revives the estate tax with some significant changes. Under the new law, the federal estate tax will apply to the estates of decedents dying after December 31, 2009 and before January 1, 2013. The new law sets a maximum estate tax rate of 35 percent with a $5 million exclusion ($10 million for married couples). Additionally, executors of estates of individuals who died in 2010 can elect out of the estate tax (and apply modified carryover basis rules) or can elect to have the estate tax apply.

Portability. The 2010 Tax Relief Act provides for portability between spouses of the $5 million estate tax exclusion after December 31, 2010. Portability allows a surviving spouse to elect to use any of the unused portion of the estate tax exclusion of the predeceased spouse, allowing married couples to effectively shield up to $10 million from estate tax.

Credits for state taxes. The 2001 Tax Act changed the tax credit for state death taxes to a deduction for estates of individuals dying after December 31, 2004. The 2010 Tax Relief Act extends the deduction for state taxes through 2012. While many states have permanently abolished a state level estate tax, Illinois has reinstituted its estate tax with a $2 million estate tax exclusion for Illinois purposes.

Gift tax rates. For gifts made in 2010, the 2010 Tax Relief Act provides that gift tax is computed using a rate schedule having a top tax rate of 35 percent and an applicable exclusion amount of $1 million. For gifts made after 2010, the gift tax is reunified with the estate tax with a top gift tax rate of 35 percent and an applicable exclusion amount of $5 million. Many high net worth individuals are considering making large gifts to utilize some or all of these much larger gift tax exclusions.

Generation Skipping Transfer (GST) Tax. For 2010, the new law provides a GST tax exemption of $5 million, with a zero percent tax rate. For transfers made after 2010, the GST rate would be equal to the highest estate tax rate in effect for the year (35 percent for 2011 and 2012).

Additional provisions. The 2010 Tax Relief Act also extends the 2001 Tax Act’s provisions affecting conservation easements, small and family-owned businesses, and installment payments for closely-held businesses.

These are just some of the provisions relating to the estate, gift and GST tax extended by the 2010 Tax Relief Act. Please contact our office if you have any questions about these provisions.