Calmer Seas Ahead for the Trust and Estate Profession

By Valerie L. Hamlet (Jan, 2011)


For most of 2010, trust and estate tax professionals had answered their clients' inquiries with "It depends." Frustration grew for everyone as the end of the year loomed ahead and Congress had still not addressed the sunset provisions of "The Bush Tax Cuts." 

Finally, on December 17, 2010, President Obama signed the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010." This new law extends many of the Bush era tax rates and retroactively reinstates the federal estate tax. There are additional, new and beneficial options available to the estate planning taxpayer as a result of this Act, but also provisions that are unusual in nature. 

Estate Tax Reinstated, Unless Opt-Out Election Made

The estate tax exemption in 2009 was $3.5 million and because an estate tax was in effect, estates enjoyed the typical increased basis at date of death commonly known as a "stepped-up basis." If the estate was valued at less than the exemption amount, it paid $0 estate tax and saved a substantial amount of capital gains tax by using an increased date of death basis for estate assets sold. 

For most of 2010, the estate tax did not exist. Without an estate tax in effect, the "stepped-up basis" was unavailable and estate assets were under a carry-over basis rule. Estate assets sold were subject to capital gains tax on the amount by which the selling price exceeded the decedent's basis. The IRS created a Modified Carry-over Basis whereby the Executor of an estate could allocate $1.3 million of increased basis to estate assets (an additional $3 million if assets were inherited by the decedent's spouse).

  • The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010:
  • Reinstates the estate tax retroactively to the beginning of 2010
  • Increases the exemption to $5 million (from $3.5 million in 2009)
  • Reinstates the "Stepped-up" basis for estate assets
  • Decreased tax rate to 35% (from 45% in 2009)
  • Gives the estate the option to "opt-out" of this law and abide by the old law in effect prior to December 17 (no estate tax in effect and carry-over basis)
  • Assigns a portable nature to the unused portion of the estate tax exemption

The last two bullets are new and unusual in nature. A 2010 decedent estate can elect to "opt-out" of this Act and not be subject to the estate tax (the estate has nine months to make this election). A newly introduced "portable exemption" will start in 2011. If a spouse dies and does not use all of his/her estate tax exemption of $5 million, the surviving spouse can "inherit" the unused portion of the exemption and use it on their future return.

Summary of Estate Tax
  2009 2010 (Opt-out) 2010 (Automatic) 2011 & 2012
Exception Amount $3.5 million $0 $5 million $5 million
Tax Rate 45% N/A 35% 35%
Basis Rule Date-of-Death Step-up Modified Carry-over Date-of-Death Step-up Date-of-Death Step-up
Portability of Unused Exemption N/A No No Yes


Gift Tax and GST (Generation-Skipping Transfer) Tax

This new Act reunifies the estate and gift tax exemptions and affords estate planning taxpayers with an advantageous window of opportunity. The annual gift tax exemption of $13,000 per donee remains unchanged, but the lifetime exemption is dramatically increased! The environment is ripe for the largest transfer of wealth in the history of our country to occur over the next two years. 

In 2009 the gift tax and GST tax exemptions against lifetime gifts were $1 million and $3.5 million, respectively. Tax rates were 35% (for gifts) and 45% (for GST).

Prior to the new legislation in 2010, the GST tax did not exist. The gift tax exemption remained at $1 million against lifetime transfers at a tax rate of 35%. Without an automatic allocation of GST transfers, complications arose for some gifts that are made over a period of several years. 

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010:

  • Reinstates the GST tax retroactively to the beginning of 2010
  • Increases the GST exemption to $5 million (from $3.5 million in 2009)
  • Decreases the tax rate to 0% for GST transfers in 2010, but increases to 35% in 2011 (45% in 2009)
  • Increases the Gift tax exemption to $5 million (from $1 million in 2009 & 2010)
Summary of Gift Tax
  2009 2010 2011 & 2012
Exemption Amount $1 million $1 million $5 million

Tax Rate

35% 35% 35%


Summary of GST Tax
  2009 2010 2011 & 2012
Exemption Amount $3.5 million $5 million $5 million

Tax Rate

45% 0% 35%


How does this new law affect clients?

The portability of a spouse's unused estate tax deduction is a new and unusual benefit for taxpayers. This combined $10 million transfer of wealth to estate beneficiaries provides tremendous estate tax savings. In light of this new portable spousal benefit, some might believe that the use of a spousal trust in the decedent's will has been rendered obsolete. This is not the case. The use of a spousal trust cannot be dismissed as no longer needed and is still a powerful estate planning tool.

The lifetime exemption for gift taxes has always been $1 million, but for 2011 and 2012 only, the lifetime exemption is $5 million. What happens if a client makes a gift of $5 million in 2011 (tax free) and on January 1, 2013, the lifetime returns to $1 million? There are some skeptical tax professionals who are concerned that in that instance, there could be a $4 million gift tax "recapture." Any recapture is highly unlikely, but still the issue is a cloud over the new legislation and worth discussion with your tax professional.

It is more important than ever before to review your estate plan with a qualified planner or your tax professional. Every situation needs individual review and assessment.


The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.


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