Estate Tax Law Changes
Hershner Hunter, LLP
On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Act”) became law. The 2010 Tax Act makes significant changes in the Federal Estate and Gift Tax.
The 2010 Tax Act:
- Provides a $5 million estate tax exemption for decedents dying in 2011 and 2012. For married couples this means a $10 million estate may escape estate tax entirely.
- Provides a $5 million gift tax exemption for gifts in 2011 and 2012. (The 2001 Tax Act had left the gift tax exemption at only $1 million despite a gradual increase in the estate tax exemption.)
- Introduces the concept of “portability” of a deceased spouse’s estate tax exemption, allowing a surviving spouse to use all of the deceased spouse’s unused estate tax exemption, even if the deceased spouse had done no tax planning (an appropriate return must be filed by the estate of the first spouse to die).
- Sets a flat 35% tax rate on the taxable portion of estates and gifts. (In 2009 the rate was 45%.)
- Allows a $5 million exemption from the generation-skipping transfer tax beginning in 2011.
- For decedents dying in 2010, applies an estate tax exemption of $5 million, but also allows an election out of the estate tax (with the trade-off of a loss of the basis adjustment traditionally available at death).
The 2010 Tax Act does little to reduce uncertainty in estate planning. The changes are effective only through December 31, 2012. If Congress takes no action before the end of 2012, the 2010 Tax Act will sunset and the tax law returns to its state as though the 2001 and 2010 Tax Acts “had never been enacted.” The maximum amount that can pass free of Federal Estate and Gift Tax will drop to $1 million, rates will range up to 55%, and the exempt amount for generation-skipping transfer tax purposes will be about $1.4 million, depending on inflation adjustments. The automatic adjustment of basis to market value will remain for assets passing from the decedent’s estate.
There is speculation that before 2013 Congress will retain the “reformed” estate tax regime described in the 2010 Tax Act; retain the estate tax, but at levels more consistent with the tax as it existed in 2009; or repeal the estate tax entirely. Obviously, this creates a difficult situation for those who wish to plan for every possibility. However, despite the yo-yo variations in the estate tax built into temporary changes to the tax law, most estate tax planning will continue to work as intended.
The increase of the gift tax exemption to $5 million creates the opportunity for new planning strategies, at least during 2011 and 2012. The larger gift tax exemption means that much more value can be given to younger generations without paying tax. Since Oregon does not tax gifts, the savings in Oregon Inheritance Tax alone may make some gifts look very attractive.
Of course, clients should not make gifts that will put their own financial security at risk. Because gifts do not increase the recipient’s income tax basis, the impact of capital gains taxes should be considered, if the recipient expects to sell appreciated assets.
If “portability” turns out to be permanent, this will be very popular for married couples. Owners of large IRAs and retirement plans who otherwise were stymied by income tax provisions governing such plans will enjoy greater flexibility.
Although the higher estate tax exemptions greatly benefit many Oregonians, the Oregon Inheritance Tax exempt amount remains at $1 million. It is important to keep this in mind, to prevent unexpected taxes that might be avoided with proper planning.
If you have questions, please contact any member of The Estate and Business Planning Practice Group:
William D. Brewer
Arthur J. Clark
This article provides general information and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. If you have specific legal questions, you are urged to consult with counsel concerning your own situation.
