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.
Florida Trust & Probate Attorneys Blog
