Major (But Temporary) Changes Just Made to the Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax Laws

Just past midnight on December 17, 2010, the federal House of Representatives voted to pass “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (the “2010 Act”). This bill, which was the result of negotiations between the Obama administration and Senate Republicans, had already passed the Senate, was then signed into law by President Obama. Among a number of other things, this act makes many major, but temporary, changes to the estate, gift, and generation-skipping transfer (“GST”) tax laws. While the new laws are much more complicated than we could reasonably discuss in a newsletter, we wanted this alert to summarize some of the highlights. Please don’t hesitate to contact us if you have any questions about the new laws or what they mean.

Among other things, the 2010 Act reinstates the federal estate tax effective as of January 1, 2010. However, the estate tax exemption for 2010 will be $5,000,000, and the tax rate for estates exceeding the exemption will be 35%. In addition, the Executor of an estate for someone who died in 2010 will be able to elect not to have the estate tax applied, but instead to apply the carry-over basis rules which originally took effect on January 1, 2010, when the federal estate tax was repealed. An Executor’s decision regarding whether to make this election will require very careful consideration of a number of factors. The Executor could also face a significant conflict of interest in making this decision.

The gift tax exemption for 2010 will remain at $1,000,000, and the gift tax rate will remain at 35%.

The 2010 Act also reinstates the federal GST tax, but with a GST tax exemption of $5,000,000 and, for 2010 transfers which would be subject to the GST tax, a 0% rate (in other words, a transfer which would have generated a GST tax if made during 2009 will generate a tax of zero dollars if made during 2010). The reintroduction of the GST tax and its exemption for 2010 makes it possible for people who contributed assets to trusts during 2010 to more easily ensure that those trusts will be GST exempt, and should eliminate the need for those clients to skip trust gifts in 2010 or make loans instead of gifts.

For the next two years, 2011 and 2012, the 2010 Act establishes a federal estate tax with an exemption of $5,000,000 and a 35% rate. The gift tax and GST tax exemptions and rates will also be $5,000,000 and 35%.

There will not be any option to elect carry-over basis rules for persons dying in 2011 or 2012. However, the Executor of the estate of someone who dies but has a surviving spouse can file an estate tax return and elect to allow any unused estate tax exemption from the deceased person to be used by the person’s surviving spouse at the spouse’s later death (this is referred to generally as “portability” of the estate tax exemption). The gift tax and GST tax exemptions will not be portable, and the estate tax exemption will not be portable without an estate tax return filing at the first spouse’s death, even if no estate tax return would have otherwise been required. While the portability rules are intended to allow people to use the estate tax exemptions from both members of a married couple without the need for them to use special estate planning provisions to do so, a brief review of these rules reveals that they only serve to introduce the need for other complicated planning measures. In fact, many, if not most, married couples will still be better served by more traditional estate planning measures, for a number of reasons too long to list here.

Finally – keep in mind that the estate, gift, and GST tax changes made by the 2010 Act are all temporary, and that they are scheduled to expire at the end of December 31, 2012. So, instead of providing their constituents with the ability to plan with any certainty, the politicians who crafted the 2010 Act have only prolonged the uncertainty and confusion which became part of the estate planning world back in 2001, when the laws which were set to expire on December 31, 2010, were put into effect. What does the future hold for years after 2012? We don’t have any idea. Stay tuned.

We will certainly be addressing the numerous issues raised by the 2010 Act in future newsletters. Please also feel free to call us at (678) 720-0750 or e-mail us at with questions or to discuss what impact the new rules may have on your planning or your clients’ planning.

– Loraine M. DiSalvo & Richard M. Morgan

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