Estate Tax Exemption Extended

Estate Tax Exemption Extended Through 2012

Background
With the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Congress restructured the estate tax exemption to increase over several years up to $3.5 million. Expecting further review by Congress, the exemption was to be suspended in 2010, only to return in 2011 at a $1 million level. Since Congress did not act by December 31, 2009, the estate tax lapsed January 1, 2010. In 2010 only, there was no tax on estates of any size, but carryover basis replaced a stepped-up basis of assets transferred to heirs. There was a limited step-up in basis of $3 million allowed for assets passing to a spouse and an additional total step up of $1.3 million for assets passing to other beneficiaries.

Exemption Extended
On December 17, 2010 the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed into law. This Act sets the estate tax exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The law sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.

Previously, couples had to do complicated estate planning to claim their entire exemption (previously $7 million per couple). The new law allows the executor of a deceased spouse's estate to transfer any unused exemption to the surviving spouse without such planning. The law is effective for estates of decedents dying after December 31, 2010.

Prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 reunifies the estate and gift taxes. The law is effective for gifts made after December 31, 2010.

Gift Tax Annual Exemption
Gift tax is a tax on assets passed from one individual to another during life. Gifts that you make to other individuals each year above a certain amount may be subject to gift tax. The amount exempted from gift tax each year is linked to the inflation rate and increases periodically to the nearest $1,000. The annual gift tax exemption for 2010 and 2011 remains at $13,000. This means that you may give up to $13,000 to any number of individuals in 2010 and 2011 without paying tax on those gifts. As an example, a couple with two children may each give $13,000 to each child, for a total of $52,000 without paying any gift tax (2 people x 2 children x $13,000 each = $52,000). The lifetime gift tax exemption may be used for gifts above the $13,000 amount.

See Federal Gift and Estate Tax Exemption Levels chart.

This web page does not provide legal or financial advice, nor is it a comprehensive review of the topic. You should consult your legal and financial advisors and Clarkson University before making or planning your gift. (12/10)