New Legislation Eliminates the Federal Estate Tax.
On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Act”) became law. The 2010 Tax Act makes significant changes in the Federal Estate and Gift Tax. Following are significant features of this law:
➣ There is now a $5 million estate tax exemption for decedents dying during calendar years 2011 and 2012. For married couples, this means an estate with a value of up to $10 million may escape estate tax entirely.
➣ There is now a $5 million gift tax exemption for gifts made during calendar years 2011 and 2012. (The gift tax exemption under the former law was only $1 million, despite an increase in the estate tax exemption.)
➣ The new law establishes a flat 35 percent tax rate on the taxable portion of estates and gifts, down from 45 percent under the former law.
➣ The new law allows a $5 million exemption from the generation-skipping transfer tax.
➣ A new concept of “portability” of a deceased spouse’s estate tax exemption has been introduced. This enables a surviving spouse to use all of the deceased spouse’s unused estate tax exemption, even if the deceased spouse had done no advance estate tax avoidance planning (but only if an appropriate return is filed by the estate of the first spouse to die).
The new law presents ongoing uncertainty in the field of estate planning. The changes are effective through December 31, 2012 and if Congress fails to act before that time, the new tax law will “sunset” and the tax law returns to its state as though this law and its immediate predecessor had never been enacted. The maximum amount which may pass free of Federal Estate and Gift Tax will drop back to $1 million, tax rates will range up to 55 percent, and the exempt amount for generation-skipping transfer tax purposes will be approximately $1.4 million. The automatic basis “step-up” to market value will remain in effect for assets passing from the decedent’s estate. This fact highlights the significance of the need to remain informed about current tax law over the upcoming decade and to ensure that your estate plan works in conjunction with the then existing law.
Our new gift tax exemption laws present planning opportunities for the next two years. This larger gift tax exemption ($5 million) means that you may now transfer much greater value to your children and grandchildren without paying tax. (The state of Oregon does not impose a tax on gifts and so will have no bearing on the implementation of this strategy. Of course, you should not make any level of gifts which will put your own financial security at risk.
Married couples will greatly benefit if the concept of “portability” is retained in future estate tax laws. Professionals with large IRAs and retirement plan assets who otherwise have experienced a great level of difficulty with the income tax overlay to their estate planning decisions will now enjoy greater flexibility.
Although the higher federal estate tax exemptions greatly benefit many individuals, the Oregon Inheritance Tax exempt amount remains at $1 million. Otherwise unexpected inheritance taxes can effectively be avoided with proper estate planning.
Despite the uncertain state of affairs in the federal estate tax domain, most estate tax planning methods employed by practiced estate planning professionals will continue to work as intended. Notwithstanding, those with estate plans currently in place review their documentation with their estate planning attorneys to ensure the existing documentation will have the intended results, given the new law.