On December 17, President Obama signed into law The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (The 2010 Act,) which went into effect immediately. The law finally addresses the rebounding estate tax, which was set to return to 2001 levels after disappearing completely in 2010.
Without the law, the estate tax exemption would have fallen back to $1,000,000, and the rate would have maxed out at 55%. The 2010 Act changes all of that.
The new exemption is $5,000,000 per person, and it will be portable between spouses, so now a couple can pass $10,000,000 free of federal estate tax to their heirs. In addition, The maximum tax rate will be 35%.
At long last, the estate and gift tax systems will be reunified, such that the same thresholds will apply to the gift tax: a $5,000,000 lifetime gift exemption and a maximum rate of 35% on any gifts over that amount.
The basis rules will also change in 2011. For 2010, the estate tax system required the use of “carry-over” basis, which meant that you inherited the same basis in property as the deceased person had. For 2011 and 2012, we are back to a system of “step-up” in basis, meaning that your basis in inherited property is equal to its date of death value. The latter is much easier to track administratively.
Finally, for a person who died in 2010, their executor has the choice of whether to administer their estate under the 2010 rules as they stood prior to The 2010 Act, or to use the new law. This decision should be carefully considered, taking into account all the possible tax ramifications.
Although it is a relief to finally have some clarity, many estate planning issues remain. The current law is only in effect through 2012. At that point, the entire system will be revisited yet again. Furthermore, even though the federal exemption amounts are rising to $5,000,000 per person, the state exemptions are all over the map. For example, the estate tax exemption in Massachusetts is only $1,000,000, while in Connecticut it is $3,500,000. Every state has its own rules and regulations. Proper estate planning is essential to save and defer taxes at both the state and federal levels.
Julie R. Lackner, Esq.
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