Florida Trust & Probate Attorneys Blog
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, simply known as the “2010 Tax Relief Act” (TRA 2010). TRA 2010 includes significant changes for estate, gift and generation-skipping transfer (“GST”) tax relief in 2011 and 2012, as well as estate and GST tax changes which apply for 2010.
For decedents dying in 2010, TRA 2010 provides for a default tax rule which leaves an estate and GST tax with a maximum rate of 35% and an applicable exclusion amount of $5 million. Although this is the default rule, the personal representative or executor of an estate can elect out and be treated as if TRA 2010 had not been enacted. Unfortunately, this results in a cost of retaining carryover basis for the transferred assets, and the need to file an election by the personal representative or executor. Therefore, for 2010, estates have two choices: (1) they can pay no estate tax, which leaves the heirs with a carryover basis for inherited assets that have appreciated by more than $1.3 million (plus $3 million for assets going to a surviving spouse) or (2) heirs can claim a stepped-up basis on the inherited assets if the estate pays estate tax at 35% on assets over $5 million.
For decedents dying in 2011 or 2012, TRA 2010 reduces the maximum estate and GST tax rate to 35% (same for gift taxes) and increases the applicable exclusion amount for estate and GST taxes to $5 million. It is important to know that the TRA 2010 has a “portability” provision, which allows the surviving spouse to use his or her deceased spouse’s unused exclusion amount, in addition to the surviving spouse’s own exclusion amount, for lifetime gifts or for transfers at death.
For decedents dying after 2012, TRA 2010 will no longer apply; rather, the provisions of the old law applies (if there is no legislative change), with estates receiving a maximum estate and gift tax rate of 55% and a maximum exclusion amount of $1 million. The “portability” provisions will also not apply, in the absence of any legislative change in the tax years after 2012.
With the new law in effect, this leaves attorneys and clients with a piece of mind of what will occur within these next two years, as opposed to the previous year of 2010.
Take Away Points
1. Most significantly, the new TRA provides only a 2 year window where we have certainty and excellent planning options. After 2012, however, all bets are off. In 2013, absent legislation, the maximum estate, gift and GST tax exemption is scheduled to go back to $1 million.
2. Although TRA 2010 has a “portability” provision of the $5 million estate tax exemption, so that a surviving spouse may use the remaining portion of a deceased spouse’s unused estate tax exemption, relying on portability may be risky as the law may change after 2012.
3. Now that there is a definite plan for the years of 2011 and 2012, this is a good time for your clients to review their estate plan and see how they can best take advantage of the new law.
Your questions or comments are welcome. Contact attorney Phil Rarick at (305) 556-5209 or prarick@raricklaw.com.