After a year of speculation as to how Congress would address the looming expiration of the 2001 and 2003 tax cuts, the answer finally came during the last week of the 2010 legislative session. The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 contains changes impacting both the 2010 tax year (extension of several previously expired provisions) and the next two years (extension of the tax cuts expiring after 2010), as well as several unanticipated items in the estate tax arena.
Under this act, the federal estate tax exemption will increase to $5 million, the largest amount ever, before reverting to $1 million in 2013. In addition, the top tax rate for estates over this amount will be reduced from 55 percent to 35 percent. Both of these changes apply to 2011 and 2012 only. However, the act provides that the exemption amount is subject to inflation adjustments after 2012, leaving the impression that lawmakers may plan on eventually extending these changes past 2012.
In a surprise addition, this exemption amount has been made portable. Any exemption amount not used at the death of one spouse may be added to the exemption amount for the surviving spouse.
The estate and gift tax systems will be re-unified under the new rules. Since 2001, the lifetime exemption had been limited to $1 million, while the estate tax exemption gradually increased to as high as $3.5 million in 2009. Under the new rules, individuals will be able to use the full $5 million exemption to make lifetime gifts without incurring gift tax. Married couples will be able to make combined lifetime gifts of up to $10 million.
Finally, there is a special election available for estates of individuals dying in 2010. Administrators of the estate of someone dying in 2010 may either: (1) elect the new $5 million estate tax exemption, with an unlimited adjustment to the basis of assets included in the decedent’s estate, or (2) elect the temporary full repeal of the estate tax, with the adjustment to the basis of the decedent’s property limited to $1.3 million (more for spousal transfers).
