The “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” (the “2010 Act”) was signed into law on December 17, 2010, preventing a number of income tax increases and making sweeping changes to the transfer tax laws. Prior to the 2010 Act, the exemptions relating to the estate tax and generation-skipping transfer tax (“GST” tax) were scheduled to revert (effective January 1, 2011) to 2001 levels (i.e., $1M per person, with the GST exemption indexed for inflation), and a 55% maximum tax rate as of January 1, 2011. This would have been a significant increase in the overall tax burden for individuals affected by the transfer tax. Coupled with this expected rollback of exemption amounts was a great deal of uncertainty regarding a number of technical aspects relating to the application of the existing law after December 31, 2010.
Transfer Tax Exemption Levels
While some sort of legislative response was desired by people on virtually all sides of the issue, the final compromise was unexpectedly generous – a $5M exemption for the estate tax, GST tax and the gift tax. During 2009, when the estate tax exemption was $3.5M, and in 2010, when the estate tax was temporarily repealed, the gift tax exemption remained at $1M per person for lifetime gift. Therefore, this greatly increased gift tax exemption under the 2010 Act provides an unprecedented opportunity for many clients to engage in lifetime gift planning without triggering the payment of gift tax. Each individual has a two year window in which to make a $5 million tax free gift. (Note that there is still some uncertainty regarding how such a gift will be treated at death, if the exemption reverts to $1 million.
Portability of Estate Tax Exemption
The 2010 Act makes it easier to transfer a person’s $5 million estate tax exemption to his or her surviving spouse. Under the 2010 Act, a married couple may be able to shield $10 million of their assets from estate taxes without the use of trusts. However, for those clients with a traditional trust-oriented estate plan, there remain a number of advantages, including avoidance of estate tax on appreciation within the bypass trust, asset protection for the surviving spouse and preservation of the decedent spouse’s GST exemption (which is not available under the statutory portability scheme).
Sunset
While the compromise provides a substantial increase in the exemption amounts and the convenience of portability, the changes are not permanent. As it currently stands, the portability provisions are only in place for two years and the exemptions are again scheduled to revert to 2001 levels on January 1, 2013. While this may be changed between now and then, it is not possible to predict with any certainty. This impact of this potential reduction can be addressed, however, if you elect to take advantage of the increased gif tax exemption during the next two years.
Income Tax Provisions
- The top income tax rate will remain at 35% for two years (It was scheduled to increase to 39.6% in 2011
- The rate on long term capital gains and dividends (which was scheduled to increase to 20%) remains at 15% for two years
- The “social security tax” for employees is reduced by 2 percentage points in 2011.
- The alternative minimum tax exemption amount for joint returns are increased to $72,450 for 2010 and to $74,450 for 2011. There were proportionally comparable increases for single taxpayers.
- The IRA charitable contribution rollover was extended through 2011. This allows individuals who are at least 70½ to transfer up to $100,000 per year to a public charity without it being transferred as a withdrawal from the IRA. The transfer can be counted toward the required minimum distribution. This provision applies for years 2010 and 2011.