New Year, New Tax Laws

How the new tax laws will impact you financially

What every homeowner must know about the newly passed tax laws

This has been a year of turmoil and uncertainty concerning the estate and gift taxes. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, commonly referred to as the 2010 Tax Relief Act, passed Congress and became law this month. This memo is to update you on the new law as it affects transfer taxes – the estate tax, the gift tax, and the generation skipping transfer tax. As you know, there has been much uncertainty this past year as the estate tax – but not the gift tax -- lapsed for one year, with the possibility of a resumption of the estate tax in 2011 with only a $1 million exemption. The passage of the 2010 Tax Relief Act has changed all of this. The following is a summary of the law as it applies in 2010, in 2011 and 2012, and finally, in 2013 and beyond.

NOTE: This memo only discusses federal law, not state transfer taxes, which vary significantly from state to state. This memo also will not address income taxes, other than to note that the current rates of tax on earned income, interest, dividends, and capital gains will continue for 2011 and 2012.

2010
The estate tax has been reinstated for all of 2010, but with important changes. The tax applies to anyone who died in 2010, but there is a $5 million exemption from the tax and a top tax rate of 35%, increased from the 2009 exemption of $3.5 million and 45%. That means that anyone who died in 2010 will have no federal estate tax up to a $5 million estate. In addition, the tax basis of all property owned by someone who died in 2010 will be “stepped-up” to the value as of the date of death, and therefore the beneficiaries only will pay capital gains tax on any increase in value since death. If anyone had an estate in excess of $5 million, the estate may opt out of the new estate tax, but the beneficiaries will pay capital gains tax on the sale of inherited assets based on what the deceased person paid for assets, known as “carry-over” basis, with an exemption of only $1,300,000 (plus $3,000,000 for assets left to a spouse). This was the law for 2010 until the recent tax law passed. The gift tax exemption in 2010 remains at $1 million, with a top rate of 35%The generation skipping transfer tax (GSTT) for 2010 has an exemption of $5 million and this exemption can be applied to generation skipping transfers either to individuals or to trusts. Transfers in excess of $5 million in 2010 will have a tax rate of ZERO percent. Therefore, someone can transfer assets in excess of $5 million to grandchildren, for example, with no GSTT, but the gift tax will begin at $1 million. Large transfers also can be made to GST trusts, but the exemption is limited to $5 million and a GSTT would be payable when assets are paid to the beneficiaries in any future years. Fortunately, the Act extends the deadline to pay and file estate tax returns for anyone who died in 2010 until at least September 17, 2011, which is nine months after the law was signed.

2011 and 2012
The estate tax exemption will be $5 million per person, with a top rate of 35%. Beneficiaries will inherit with assets stepped-up in basis to the date of death value. In addition, the estate of a person who dies with an estate of less that $5 million can file an estate tax return and preserve the unused exemption for the person’s surviving spouse. The gift tax exemption will be $5 million per person, with a top rate of 35%. The GSTT will have a $5 million exemption and a top rate of 35%.

2013 and beyond
Since the 2010 Tax Relief Act applies only to 2011 and 2012, we do not know what future years will bring. If nothing is done, the taxes will revert to the old exemptions and rates – gift and estate tax exemptions of $1 million and top rate of 55%. The GSTT exemption would be approximately $1.4 million, based on inflation over the past decade. We have some certainty for the next two years, and then a period of continued confusion. Please contact us at any time if you would like a further explanation of the 2010 Tax Relief Act, or to discuss how it might impact your estate plan. We are prepared to discuss the options and alternatives available to you and your family.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

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