Estate Planning Aspects of The Tax Relief, Unemployment
Insurance Reauthorization and Job Creation Act of 2010


By: David L. Case


Last December, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) was signed into law.  In addition to extending the “Bush Income Tax Cuts” of 2001, a part of this new law contains new wealth transfer tax rules for 2010, 2011, and 2012.  This article provides a very brief overview of the wealth transfer tax portion of the Act.

Highlights.  The highlights of the new law are a new unified maximum tax rate of 35% and lifetime exemption level of $5 million for all three wealth transfer taxes - gift, estate and generation-skipping transfer tax (“GXT tax”) - retroactive to January 1, 2010 and applicable through 2012.  This compares to the 2009 law, which had a maximum transfer tax rate of 45%, a lifetime exemption for gift tax of $1 million, and a lifetime exemption for estate tax and generation-skipping tax of $3.5 million.  And part and parcel to re-enactment of the estate tax is re-institution of the I.R.C. §1014 “step up” (or step down) of income tax basis for assets received from a decedent’s estate, from January 1, 2010 forward, to date of death value.  Carryover basis is repealed.  This is, of course, very important because income tax basis is subtracted from the sale price of assets to determine taxable gain upon sale.  These basis adjustment rules apply even if there is no estate tax liability.

Though in the grand scheme of things the new rules are reasonable and beneficial, planning long term is made very difficult because the Act is effective for only two more years. Unless Congress extends the Act, the 2001 Act is reinstated (maximum transfer tax rate was 55% and the lifetime exemption (adjusted for inflation) was $1 million). 
Still, the Act may be made permanent, but if it is not, there are many estate planning opportunities available until 2012.

Retroactivity Aspects.  As stated, part of the new law re-enacted retroactively to January 1, 2010 the estate tax and generation-skipping transfer tax (“GST Tax”).  The GST Tax is applied to certain transfers of wealth to persons who are two or more generations below that of the transferor.  Though the gift tax remained for all of 2010, the estate tax and GST Tax expired for 2010 until re-enacted.  To avoid the harsh and arguably unfair result of retroactivity of the estate tax (and possibly constitutional legal challenges), the blow of this retroactivity is offset by allowing estates to elect to have the carry over basis rules apply for 2010 decedents instead of the estate tax.  The solution to avoid the harshness of retroactivity for the GST Tax was to provide for a 2010 tax rate of zero, which provided several short-fused tax planning opportunities, such as making outright gifts in 2010 to skip persons such as grandchildren. 

Planning Opportunities.  The Act did not, as once feared, eliminate or reduce the benefits of many of the advanced estate planning techniques that have been popular in recent years.  For example, the various proposed limitations on GRATs (grantor retained annuity trusts) and QPRTs (qualified personal residence trusts), and use of minority interest valuation discounts for gifts and sales of interests in family entities and other assets, were not covered in this legislation.  Thus, as with the last couple years, with depressed values and interest rates, and a further planning window, these techniques should be taken advantage of now where appropriate.

And of course, the new lifetime exemption for 2010, 2011, and 2012 for each individual for gift, estate and GST Tax are all $5 million (except that gift tax exemption for 2010 remains $1 million), which also provide for huge planning potential for those who want to reduce future tax liability for family and other heirs.  Many clients are already planning on making substantial gift transfers prior to 2013, either outright or in trust for family and other beneficiaries in order to take advantage of the new exemption levels.  This not only gets the future appreciation of these assets out of the donor’s estate for estate tax purposes, it also allows any taxable income accruing after the gift to accumulate in the donee’s estate and perhaps at a lesser income tax rate.  With most assets still having depressed values, gifting now also allows the expected rebound in value to occur outside the estate of the donor.  If the unlikely occurs and the $5 million gift tax exemption is only available for two years, or worse yet Congress does not act further and in 2013, a $1 million exemption for gift tax and estate tax and a 55% tax rate apply, missing this window of opportunity could be disastrous from a tax planning perspective.

Gift Tax Annual Exclusion Continues.  The changes in the gift tax lifetime exemptions do not change the annual exclusion for gift tax, where every individual may gift up to $13,000 per year to any other person ($26,000 in the case of a married couple) free from any gift tax.  (This amount also is indexed for inflation.)  This renews every year and should be considered annually by all clients with large estates in order to take advantage of the resultant reduction in future estate tax liability. 

There are numerous other aspects of the Act that are not covered.  Our firm can assist clients in navigating the ramifications of the Act in order to plan effectively. For more information about Tiffany & Bosco’s resources in this area, please contact David L. Case at (602) 255-6097 or dlc@tblaw.com.
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