Special Report - Estate and Gift Tax Changes
After years of dithering and inaction, Congress has finally acted on estate and gift tax issues. The good news is that we will not see a massive tax increase on January 1. The bad news is that this is only a temporary two year fix for 2011 and 2012. So we will continue to face uncertainty when it comes to estate planning, until Congress gives us a permanent solution.
Here is a brief overview of the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (Act) which was signed by President Obama on December 17, 2010:
1. History. In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which gradually lowered the maximum estate tax rate from 60% to 45% in 2009, and which gradually increased the estate tax exemption amount from $675,000 to $3.5 million in 2009. The intent in 2001 was to repeal the “death tax” in 2010 permanently, but because of the inability to get 60 votes in the Senate, EGTRRA was to sunset at the end of 2010. There were numerous attempts between 2001 and 2009 to make the change permanent, but these all failed. So the estate tax did in fact disappear for deaths in 2010, and the heirs of a few prominent billionaires were very happy for that. However, when the clock strikes midnight on December 31, 2010, the estate tax was scheduled to come back with a vengeance, with only a $1 million exemption and a 55% tax rate.
2. New Act. The new Act brings back the estate tax for 2011 and 2012. For deaths during those years the exemption amount will be $5 million, and the maximum tax rate will be 35%. However, unless the law is extended/changed, the exemption will drop to $1 million in 2013, with a 55% tax rate. Deja Vu all over again.
The new Act is retroactive to January 1, 2010, but estates of persons who died in 2010 are given a choice: pay no estate tax, but the income tax basis adjustment on the date of death is limited; or become subject to the estate tax (with a $5 million exemption) and receive the full basis adjustment.
The new Act adds a new concept for married couples: “portability”. This means that if the first spouse to die did not fully use his or her $5 million exemption, the unused balance is added to the $5 million exemption of the surviving spouse.
The new Act also reunifies the gift and estate tax. In recent years they had been decoupled, so that during life the most that could be given without tax was $1 million. By reunifying the taxes, this means that you could now give $5 million during life without paying a gift tax. Of course, any of the exemption used during life would not be available on death.
The new Act also increases the Generation Skipping Tax exemption to $5 million.
3. Wisconsin Impact. Until 2008, Wisconsin taxed estates, and only allowed a $675,000 exemption. In 2008, 2009 and 2010 there was no Wisconsin estate tax. Because the new Act continues the concept of a deduction for state death taxes instead of a credit, Wisconsin will continue to not have an estate tax in 2011 and 2012 (unless the Wisconsin legislature changes the law).
4. Estate Administration Impact. For those involved with the administration of the estates of persons who died in 2010, a detailed study of the new Act is necessary to be certain that the proper tax elections are made, and that the necessary forms are timely filed with the IRS.
5. Estate Planning Impact. We realize that the continuing uncertainty about estate and gift taxes is unsettling to many of our clients. Congress is apparently unaware, or does not care, that estate planning is a long term process, and involves some of the most personal and important issues in our lives. Until we are provided with a predictable estate and gift tax law, we must continue to prepare estate plans that are as flexible as possible. Many of our clients have deferred having their estate plans reviewed until the tax law was settled. This is no longer wise. Older estate plans must be reviewed to see if they are flexible enough to deal with this uncertain tax world. As a rule of thumb, if the total value of all of your assets, including the face value of life insurance, retirement plans, real estate, investments, etc. exceeds $1 million, or if you have not updated your will within the last 10 years, then your plan should be reviewed in light of these and other changes to the law.
6. Gifting Opportunity. For clients considering whether or not to make large gifts to family members, 2011 and 2012 present an excellent opportunity to shelter assets from estate taxation for many generations to come.
While not the permanent solution we had hoped for, we view the new Act as a “glass half full” which presents positive estate planning opportunities for our clients. We will continue to monitor the situation as more details about the new Act develop, and we are happy to talk to you about any questions you may have.
Our estate planning team is happy to meet with you in 2011 to review your current plan and discuss these matters in more detail.
All of us at Menn Law wish you a Merry Christmas and a Happy New Year!
Joe Bielinski Doug Hahn Perry Pierre Mary Lokensgard