THE ACT PRESENTS MANY PLANNING OPPORTUNITIES, AND THESE OPPORTUNITIES MAY ONLY BE AVAILABLE FOR THE NEXT TWO YEARS.  IT IS ESSENTIAL THAT YOU REVIEW YOUR ESTATE PLANNING DOCUMENTS AT THIS TIME.

The following is a brief outline of the estate, generation-skipping transfer and gift tax provisions of the Act.

Estate Tax Exemption and Rate:  As of January 1, 2011, the federal estate tax was reinstated with a $5 million exemption and a tax rate of 35% on the value of the net estate in excess of $5 million.  These rules will apply until December 31, 2012.  After that date, absent Congressional action, the federal estate tax exemption will decrease to $1 million and the tax rate will increase to 55% on the value of the net estate in excess of $1 million. 

We recommend that all estate plans be reviewed.  This review is important even for individuals whose assets do not exceed $5 million, since the $5 million exemption only applies for two years, and the New York State estate tax exemption is only $1 million. 

Step-Up in Basis:  The Act also reinstates the “stepped-up” basis rules.  Under these rules, for income tax purposes, the basis of inherited assets sold by an estate or its beneficiaries is equal to the fair market value of those assets as of the date of death (or as of the alternative valuation date if selected by the Executors).  Under the law applicable to decedents who died in 2010, the stepped-up basis rules applied only to a limited extent.

Retroactivity:  The changes to the estate tax exemption and rates and the restoration of the stepped-up basis rules are retroactive to January 1, 2010.  However, as explained below in more detail, Executors of estates of decedents who died in 2010 may opt out of the new rules and elect to apply the law as it existed in 2010 prior to the enactment of the new law.

Exemption may be transferred to Surviving Spouse:  If the estate of an individual who dies in 2011 or 2012 does not use its entire $5 million estate tax exemption, the Executors may transfer the unused portion of the exemption to the individual’s surviving spouse.  This “portability” provision is a new concept in estate tax law and presents new planning opportunities which might be incorporated into Wills and Trusts.   

Generation-Skipping Transfer Taxes:  As of January 1, 2011, the federal generation-skipping transfer tax was reinstated with a $5 million exemption and a tax rate of 35% on the amount of aggregate lifetime generation-skipping transfers in excess of $5 million.  As with the estate tax, these rules will apply until December 31, 2012.  After that date, absent Congressional action, the federal generation-skipping transfer tax exemption will decrease to $1 million and the tax rate will increase to 55% on the amount of aggregate lifetime generation-skipping transfers in excess of $1 million. 

Gift Tax:  As of January 1, 2011, the federal gift tax exemption was increased from $1 million to $5 million.  The gift tax rate remains at 35% on the amount of aggregate lifetime gifts in excess of $5 million.  These rules will apply until December 31, 2012.  After that date, absent Congressional action, the federal gift tax exemption will decrease to $1 million and the tax rate will increase to 55% on the amount of aggregate lifetime gifts in excess of $1 million.  The Act provides an opportunity to reduce your estate at no gift tax cost by making substantial gifts over the next two years. 

2010 Estates:  Generally, under the Act, estates of decedents who died in 2010 will benefit from the step-up in basis rules for purposes of computing gain or loss on the sale of all estate assets, but will be subject to a federal estate tax of 35% if the value of the estate is greater than the $5 million exemption.  Executors of estates with assets in excess of $5 million may opt out of the new rules in order to avoid any federal estate tax liability, but, in that case, the estate and its beneficiaries will not receive the benefit of an unlimited step-up in basis.  Therefore, Executors of these estates must weigh the estate tax costs under the new rules against the income tax costs of opting out of the new rules.

WE ENCOURAGE YOU TO CONTACT THIS OFFICE SO THAT WE MAY REVIEW YOUR EXISTING ESTATE PLAN OR CREATE AN ESTATE PLAN FOR YOU IF YOU PRESENTLY DO NOT HAVE ONE.

TAX ADVICE DISCLOSURE: THIS WRITTEN COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED BY ANY TAXPAYER, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER.  THE FOREGOING LEGEND HAS BEEN AFFIXED PURSUANT TO U.S. TREASURY REGULATIONS GOVERNING TAX PRACTICE.

THIS MEMORANDUM IS MEANT TO ASSIST IN GENERAL UNDERSTANDING OF THE CURRENT LAW AND MAY CONSTITUTE ATTORNEY ADVERTISING.  IT SHOULD NOT BE REGARDED AS LEGAL ADVICE.  THOSE WITH PARTICULAR QUESTIONS SHOULD SEEK THE ADVICE OF COUNSEL. 

© Lamb & Barnosky, LLP, 2011