Tax Relief Act of 2010: Estate, Gift and GST Tax Changes
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. In addition to extending the Bush-era tax cuts for two years, the new legislation addresses the unusual situation that was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) with regard to the estate, gift and generation-skipping transfer (GST) taxes.
Under EGTRRA, the estate tax did not apply at all in 2010, but would have again been effective as of January 1, 2011, with a $1 million exemption and a 55% top marginal rate. Likewise, the GST tax did not apply in 2010, but would have become effective again as of January 1, 2011, with a $1.36 million inflation-adjusted exemption and a 55% rate. Without Congressional action, the gift tax rate also was scheduled to rise from 35% in 2010 to a 55% top marginal rate in 2011.
In addition to repealing the estate tax for 2010, EGTRRA provided that for decedents dying in 2010, inherited property was subject to EGTRRA's modified carryover basis rules. Under these rules, a decedent's cost basis in an asset for income tax purposes generally carried over to the beneficiary, potentially resulting in significant capital gains upon the subsequent sale of the asset. This was not the case under the pre-EGTRRA step-up in basis rules, which allow for a cost basis adjustment of a decedent's assets to the date-of-death fair market value. Under the sunset provisions of EGTRRA, the step-up in basis rules were scheduled to return for 2011.
Estate Tax Changes
Among other changes, the Tax Relief Act lowers the federal estate tax for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million (as indexed for inflation after 2011) and by reducing the top marginal rate from 55% to 35%. In addition, the new legislation introduces a "spousal portability" feature for decedents dying after December 31, 2010, which allows the executor of a deceased spouse's estate to transfer any unused exemption to the surviving spouse.
For decedents dying in 2010, the Tax Relief Act allows the decedent's estate to choose the more beneficial of two options: (1) the act's newly created estate tax system (under which the estate tax would apply with a $5 million exemption and at a top marginal rate of 35%, and the assets would receive a step-up in basis); and (2) EGTRRA's modified carryover basis system (under which there would be no estate tax and the assets would not receive a step-up in basis).
Gift Tax Changes
The Tax Relief Act reunifies the gift tax with the estate tax for gifts made after December 31, 2010, increasing the gift tax exemption amount to $5 million and setting the rates for gifts beyond that amount at 35% through 2012.
GST Tax Changes
In order to ensure a death tax at each successive generational level, the GST tax is imposed on transfers to grandchildren or more remote descendants. In addition to offering estate tax relief through 2012, the Tax Relief Act lowers the GST tax for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million (as indexed for inflation after 2011) and reducing the top marginal rate from 55% to 35%.
The act also increases the GST exemption amount to $5 million for 2010 and imposes a GST tax rate of zero for 2010. This offers a rare opportunity for those who want to transfer wealth, as gifts to grandchildren and/or more remote descendants can be made prior to December 31, 2010 without the imposition of a GST tax and without using any of the donor's GST exemption.