Happy New Year, everyone! We have some exciting new tax laws. On December 17, 2010, President Obama signed into law the 2010 Tax Relief Act. I will explain the most important changes in estate and gift taxes.
Temporary Law. Important parts of the new law are only temporary. If Congress does not further change the law, many of the benefits of the new law will disappear on January 1, 2013.
$5,000,000 Exemption. The federal estate tax exemption is now $5,000,000 per person. A U.S. resident can die with up to $5,000,000 in assets without paying any federal estate tax. For estates over $5,000,000 the tax rate is 35%. The $5,000,000 exemption amount can increase with inflation after 2011. However, on January 1, 2013, the exemption drops back down to $1,000,000 per person, with a tax rate of 55% for estates over $3,000,000, unless Congress again changes the law.
Portability of Exemption. If a married person dies after December 31, 2010, the surviving spouse can use the part of the estate tax exemption that the first spouse did not use. For example, suppose that husband dies in 2011 with $3,000,000. His estate uses $3,000,000 of his $5,000,000 exemption, and pays no tax. The surviving wife can claim his unused exemption of $2,000,000. Now, she can die with up to $7,000,000 tax free. To use this opportunity, an election must be made on the estate tax return when the first spouse dies.
Unified Gift and Estate Tax. Under the new law, you can either die with up to $5,000,000 tax free, or give away up to $5,000,000 tax free. If you give away $2,000,000 tax free while living, then you can die with another $3,000,000 tax free. Before the law is changed again, you have a tremendous opportunity to make tax free gifts. However, be sure to get expert advice before giving away property. Some ways of giving property are better than others.
Generation Skipping Transfer (GST) Tax Exemption. The GST tax is a tax in addition to the estate tax, which must be paid when you give away assets to grandchildren or others in a lower generation than grandchildren. For gifts made after December 31, 2010, the new tax law provides a GST tax exemption of $5,000,000 and a tax of 35% on GST gifts over $5,000,000. There are several advantages to making gifts to a GST Exempt Trust, rather than directly to children or grandchildren. Be sure to discuss the advantages with an expert.
Death in 2010. Before the new law, there was no estate tax for persons dying in 2010, and special “modified stepped up basis” rules were to apply in 2010 only. (You may read about “Stepped Up Basis” and “Stepped Up Basis in 2010” at www.new.okuralaw.com, under “estate planning articles.”) Under the new law, the property of a person who died in 2010 is subject to the tax on everything above $5,000,000, and gets a stepped up basis. However, the estate can elect to have no estate tax and be subject to the modified stepped up basis rules. If someone died in 2010 with less than $5,000,000, probably you would be better off not making the election, but do check with an expert.
Hawaii Estate Tax. Before Christmas, I was contacted by an associate editor of Forbes Magazine. She was working on an article about the new tax law and asked me whether the Hawaii Estate Tax will still have a $3,500,000 exemption, or increase to $5,000,000. I told her that the Hawaii State Tax Department is saying that the exemption remains at $3,500,000, but the law is written in such a way, that it could be interpreted to mean that the Hawaii estate tax exemption is now $5,000,000, following the federal law. If the Hawaii legislature does not rewrite the law more clearly, I predict that there will be a lawsuit when someone dies in Hawaii with more than $3,500,000.