Estate and Gift Tax Provisions of the Tax Extension Act

January 3, 2011

On December 16, 2010 the Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”), which President Obama signed into law on December 17, 2010. The Act provides that those provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that were due to expire on December 31, 2010 are now extended to December 31, 2012. In addition, the Act provides for extension of federal funding of unemployment insurance, a 2% payroll tax credit and other stimulus measures. The Act also retroactively reinstates an estate tax of 35% on estates greater than $5 million, re-unifies the estate and gift tax exclusion at $5 million and reinstates the generation skipping transfer (GST) tax for gifts made after December 31, 2010. This alert summarizes the estate and gift tax provisions of the Act.

Under EGTRRA, the estate tax was repealed with respect to all estates of decedents who died on and after January 1, 2010. The repeal was scheduled to “sunset” effective January 1, 2011 with the estate tax being re-imposed at the rate of 55% on estates valued at over $1 million. The Act reinstates the estate tax retroactively to January 1, 2010 but at a 35% rate on estates valued over $5 million (the “Exclusion Amount”). The Exclusion Amount is indexed for inflation after 2011. For estates of decedents who died during 2010, the Act permits the executor of the estate to “opt out” of the Act’s estate tax. Before opting-out, executors of estates valued in excess of $5 million should carefully evaluate whether the benefits of increased basis of estate assets are outweighed by the estate tax that would otherwise be imposed. Starting in 2011, the Act also indexes the Exclusion Amount for inflation and makes it portable between spouses under certain circumstances. Since the Act amends the provisions of EGTRRA, the higher Exclusion Amount and lower estate tax rate expire December 31, 2012. If Congress takes no further action, the $1 million exemption amount and 55% estate tax rate will be reinstated on January 1, 2013.

Although EGTRRA provided for increases in the estate tax exclusion amount from $1 million to $3.5 million, the gift tax exclusion remained at $1 million. Under the Act, the estate and gift tax exclusions are reunified at $5 million, which means individuals can make up to $5 million in lifetime gifts before any gift tax is imposed. Those who have used their full $1 million gift tax exemption now have an additional $4 million in gift tax exemption availability, at least through 2012. It should be kept in mind, however, that any gift tax exemption used is deducted from the Exclusion Amount for estate tax purposes. Those considering making gifts in excess of the annual exclusion amount (currently $13,000.00 per donee) that have used up their $1 million exemption should consider waiting until after January 1, 2011, when they can then take advantage of the higher, unified gift tax exclusion and avoid paying gift tax, unless they are considering making direct gifts to grandchildren. (See GST EXEMPTION INCREASED). Ensure that bartenders are trained in responsible alcohol sales and service and instruct them to stop serving individuals who appear to be intoxicated and not to sell to anyone who could be underage unless a valid ID establishing legal age is provided.

In keeping with the unified estate and gift regime, the GST tax exemption is raised to $5 million through 2012, and is similarly indexed for inflation for future years. The GST tax is a tax in addition to gift or estate tax that imposed on transfers made to so-called “skip” persons, general speaking those in a generation other than the one directly below the donor. For 2010 only, no GST tax is imposed on direct gifts to grandchildren. Those who wish to make gifts to GST trusts should proceed with caution and carefully consider the opt-out provisions applicable to such trusts in the Act to ensure that distributions from generation-skipping trusts in 2011 and beyond are not subject to GST tax. Melissa McMorries Melissa (Missi) McMorries is a member of the Business Transactions, Corporate & Taxation group of Taylor English and has extensive experience in a variety of corporate matters, both large and small. Her practice includes Estate Planning, with experience assisting owners of closely-held businesses transition their holdings to the next generation.

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