ESTATE PLANNING ALERT
February 2011
The passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act
of 2010 (“2010 Tax Relief Act”) on December 17, 2010 brought major changes in the estate, gift
and generation skipping transfer (GST) tax laws for the next two years. New and valuable
opportunities for estate planning exist and individuals should review their existing plans and
documents in light of the changes.
History of Estate Tax Law
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) enacted in 2001 provided
for incremental increases in the estate tax and GST tax exemptions from $1 million in 2001 to
$3.5 million in 2009, followed by a one year repeal of estate and GST taxes in 2010. EGTRRA
also provided for a gradual reduction in estate tax rates from 55% and 60% to 45%. Without
action from Congress, EGTRRA was scheduled to sunset on December 31, 2010, resulting in a
reinstatement of the $1 million estate and GST tax exemptions and estate tax rate of 55% for
estates above $3 million and 60% for estates above $10 million. The 2010 Tax Relief Act
extends the sunset provisions of EGTRRA until December 31, 2012.
Estate and Gift Taxes under the 2010 Tax Relief Act
For individuals dying in 2010, 2011 and 2012, the estate tax exemption is $5 million and the top
estate tax rate is 35%. Inherited assets will receive a stepped up (or stepped down) federal
income tax basis to reflect fair market value on the decedent’s date of death. Estates of
decedents dying in 2010 have the option to elect estate tax repeal and modified carryover basis.
Estate tax exemptions not used by a spouse dying in 2011 or 2012 may be available for use by
the surviving spouse (“portability”) in addition to his or her own $5 million exemption for
taxable transfers made during life or at death. A timely estate tax return is required for a
deceased spouse’s unused estate tax exemption to be used by the surviving spouse. Portability is
not applicable to the GST tax.
For 2011 and 2012, the gift and estate tax exemptions and rates are unified, so the $5 million
exemption and 35% tax rate also apply to lifetime gifts. Individuals who exhausted their prior $1
million gift tax exemption now have the opportunity to make an additional $4 million in lifetime
gifts without incurring gift tax liability. This opportunity may be limited because the gift tax
exemption will return to $1 million in 2013 without Congressional action.
The GST tax is an additional tax on transfers to grandchildren and more distant descendants
during life or after death. The maximum tax rate for 2011 and 2012 is 35% and the exemption
amount is $5 million. The GST tax rate for 2010 is zero.
Planning for the Future
Planning today is essential to effectively take advantage of new changes in the law. The
possibility of reinstatement of the pre-EGTRRA exemption amounts and tax rates called for in
2013 will result in a much larger segment of the population being subject to estate taxation.
Individuals should consider the impact of the new legislation on their estate plan. Formula
clauses keyed to estate tax figures should be reviewed in light of the new $5 million federal
estate tax exclusion.
The portability of the estate tax may not eliminate the need to set up credit shelter trusts. Credit
shelter trusts may be used to protect appreciation between the death of the first spouse and the
death of the second spouse from being subject to estate tax. A credit shelter trust is essential to
the preservation of the deceased spouse’s GST exemption, since there is no portability with
respect to the GST tax. Since portability is scheduled to expire at the end of 2012, the use of
credit shelter trusts provides a stable approach to estate tax planning.
The limited opportunity to make gifts at the 35% tax rate should be considered. Lifetime gifts
made more than three years before death will remove future appreciation from one’s estate.
An executor of an estate of a decedent dying in 2010 must analyze which estate tax regime
(repeal with modified carryover basis or $5 million estate tax exemption with stepped up basis)
will produce the lowest combined estate and income taxes for the estate and its beneficiaries.
Consideration should be given to the estate tax cost versus income tax cost, timing of asset sales
and future tax planning. Fiduciaries for estates of decedents dying in states with an estate tax
(like Maryland and the District of Columbia) should consider the effect of the election on state
death taxes.
Individuals should review their powers of attorney, which may have been written with different
tax and legal objectives. Consider revising or including specific provisions for gifting by your
agent. Other rights may warrant expanding, restricting or eliminating in light of the 2010 Tax
Relief Act and the recent updates to the power of attorney laws in Virginia and Maryland.
Circular 230 Notice: Any tax advice contained herein is not intended or written to be used, and
cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under
federal, state or local tax laws.