• The 2010 Tax Relief Act and Estate Planning Implications

By Brendan King

March 28, 2011

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance and Job Creation Act of 2010. The law introduces significant changes to the federal transfer tax exemptions and rates that impact estate planning.

People have many questions about the recently signed law. Interestingly, the one that I most often hear is: “Is the new law permanent?” The answer is no. The law is temporary and will only be in effect for 2011/ 2012. At this time, no one knows how or when the law will be adjusted for 2013 and beyond.

Some of the new law’s provisions are quite generous, allowing people to transfer wealth through 2012.  High points of the new law include the increased estate tax exemption, portability of estate tax credit for surviving spouses, the increased gift tax exemption and the increased generation-skipping exemption. Additionally, the law is retroactive to the estates of people who died in 2010. Stated in their simplest elements, the changes include:

  • The federal estate tax exemption for the next two years is $5,000,000 and the estate tax  rate that is imposed on the value of an estate over the $5M is 35%
  • Likewise, the generation-skipping transfer tax exemption has also been increased to $5,000,000 with a 35% rate, meaning that transfers up to the exemption can “skip” living generations without incurring a separate transfer tax
  • Under the new law the concept of “portability” is complex, but basically stated, it  allows the surviving spouse to elect to use the first-to-die spouse’s unused federal estate tax exemption
  • The lifetime gift tax exemption has been increased from $1,000,000 to $5,000,000
  • For estates of persons who died in 2010, the executor can elect to have the new law apply as an alternative to the law that was in effect in 2010 (no federal estate tax, but with a limited basis “step-up” for income tax purposes)

The fact that these changes are effective only from this year through 2012 is reason enough to review your estate plan to understand the opportunities you could take advantage of to benefit you and your heirs.  While the increase in the federal exemption amount means that many more families will escape the federal estate tax, the reality for Massachusetts residents is that our state estate tax threshold remains fixed at $1,000,000, a number that is not likely to increase any time soon.

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