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Highlights Of The Recent Federal Estate, Gift And Generation Skipping Transfer Tax Amendments

By: Angela B. Kosar, Esquire

December 17, 2010 marked the arrival of the long-awaited answer to whether the Federal Estate, Gift and Generation Skipping Transfer Tax thresholds would revert back to those set forth in 2001, prior to the changes enacted by then President George W. Bush. On that date, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (referred to as TRA 2010). While to most taxpayers this act is best known for its reduction of federal payroll taxes that made everyone’s paychecks a little bigger, it also had some significant and beneficial changes to the Federal Estate, Gift and Generation Skipping Transfer taxes already in place.

Here are the highlights of TRA 2010:

  1. The Federal Estate Tax (FET) exemption is raised to $5Million for the years 2011 and 2012 and is indexed for inflation. This is a significant increase from the last FET exemption amount of $3.5Million in 2009. President Bush’s legislation eliminated the FET for 2010.
  2. The top FET tax rate for estates that exceed $5Million is 35% for 2011 and 2012. This is significant in that had Congress not taken action, the top tax rate would have returned to its 2001 level of 55%.
  3. The Federal Gift Tax exemption is unified with the FET and is set at $5Million for 2011 and 2012, also indexed for inflation. This is again a significant increase from the $1Million Federal Gift Tax exemption amount from 2009.
  4. The Generation Skipping Transfer tax (GST) exemption, which is commonly applicable to transfers made directly to grandchildren or anyone else 37 ½ years younger than the transferor, is also set at $5Million for the years 2011 and 2012, and is indexed for inflation. Like the FET, this is an increase from the $3.5Million exemption available in 2009. GST was also eliminated for 2010.
  5. The beneficiaries of an estate now receive a full “step-up” in tax basis to the value of the inherited asset as of the date of Decedent’s death.
  6. For the first time, “portability” of both the FET and Federal Gift Tax exemptions is available for 2011 and 2012. By way of background, the prior Federal Estate and Gift Tax rules created a situation where if an individual died and did not use the entirety of their FET or Gift Tax exemption, it was lost. Under TRA 2010, a surviving spouse may use the remaining portions of the FET and/or Gift Tax exemptions of the deceased spouse if he/she passes away in 2011 or 2012. The GST exemption is not portable.
  7. The portability concept is best demonstrated by illustration. A husband passes away in 2011, survived by his wife and their children. He has an estate valued at $2Million and has gifted $2Million over his lifetime. He has used, then, $4Million of his available $5Million FET/Gift Tax exemption. The remaining $1Million FET/Gift Tax exemption can be claimed by the surviving spouse, giving her a total FET/Gift Tax exemption of $6Million. Alternatively, the same husband could give $4Million of his estate to his children exempt from FET, and the surviving spouse would still have the same FET/Gift Tax exemption of $6Million through portability.
  8. While these changes are beneficial, they also create some potential pitfalls. New Jersey, among other states, has its own estate tax, separate and apart from the Federal tax structure. None of the changes in TRA 2010 apply to state estate tax schemes. Since, for example, the New Jersey estate tax exemption of $675,000 is significantly less than the $5Million FET exemption, this can create the potential for a large state estate tax liability that could otherwise be avoided with careful estate planning.
  9. In addition, TRA 2010 is set to expire December 31, 2012. So while these changes are here, they will not last long. Congress’ failure to take long term action regarding these issues before the expiration of TRA 2010 will return taxpayers to the 2009 uncertainty previously experienced.
  10. These new tax changes reinforce the concept that an estate plan is not a one size fits all item. Careful consideration of each individual’s estate assets and goals is necessary to determine what planning is best suited. Connor, Weber & Oberlies stands ready to assist clients in Pennsylvania and New Jersey with their estate planning needs. Please contact us for a review of your current estate plan, or to schedule an appointment to update or prepare an estate plan for you.