Summary Of Changes To The Estate And Gift Tax Laws In 2011 And 2012 Resulting From Enactment Of The “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010”

Senate Majority Leader Harry Reid (D/NV) has introduced legislation designed to enact the tax cut compromise that was reached last week between President Obama and Senate Republicans. Entitled the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” the present bill is structured as an amendment to current law enacted in 2001 under President George W. Bush, the “Economic Growth and Tax Relief Reconciliation Act.”

The new rules for estate, gift and generation skipping taxes in 2011 and 2012 are set forth in Section 3.02 of the new bill. Here is a summary of the provisions of the bill covering estate, gift and generation-skipping transfer taxes:

  • Estate, gift and generation-skipping transfer tax exemptions and rates set for two years. The bill sets the amount exempt from taxation at $5 million per person and $10 million per couple. In addition, a top tax rate of 35% is established for estate, gift, and generation skipping transfer taxes for 2011 and 2012, and a 0% generation-skipping transfer tax rate is established for 2010.The exempt amount is indexed for inflation beginning in 2012.
  • Portability of unused estate tax exemption. Under current law, couples must have complicated estate plans including trusts and other planning devices to utilize their entire tax exemption. The proposed new law allows the executor of a deceased spouse’s estate to transfer any of the $5 million tax exemption that was not used after the death of the first spouse to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.
  • Estate and gift tax systems unified. The estate and gift tax systems would be unified under the proposed law, creating a single graduated rate schedule. As a result, the $5 million estate tax exemption could be used to offset taxes due on lifetime gifts and/or bequests. For example, if a “taxable” gift of $4 million dollars was made during a taxpayer’s lifetime, no taxes would be paid. Instead, the taxpayer would use the $5 million estate tax exemption to offset any gift taxes due, and the taxpayer would have $1 million remaining to offset estate taxes at death. There is no change in the annual exclusion amount for gifts, which is currently $13,000 a year per donee.
  • Retroactive application of the estate tax. Under present law, there is no estate tax in 2010, and “modified carry-over basis” rules replace the estate tax. (Under the “modified carry-over basis” rules, the value of property inherited by the heirs of decedents who die on or after January 1, 2010 is the lesser of the fair market value of the property on the date of death or the decedent’s original income tax basis in the property plus the value of certain improvements, subject to limitations.) The new bill reinstates the estate tax back to January 1, 2010,  with a $5 million exemption and 35% estate tax rate, but gives the heirs of decedents who die in 2010 the option to elect either the $5 million exemption and 35% rate or instead the modified carry-over basis rules.

The Senate plans to vote on the Reid bill on Monday, December 13th.

UPDATED ON DECEMBER 18, 2010: The negotiations took longer than expected, but the Congress voted in favor of the new tax relief act and President Obama signed the bill into law on December 17th. A good summary of the new law can be found here. In addition, more insight on the provisions of the new law can be found here: Joint Committee on Taxation’s explanation of the new tax law.