Legal Update
Dec 28, 2010
Transfer Tax Highlights of the 2010 Tax Act and Related Estate Planning Opportunities
On December 17th, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Tax Act”). The 2010 Tax Act temporarily extends many of the taxpayer-friendly rates and incentives of the so-called “Bush Tax Cuts” of 2001 and 2003, including estate, gift and generation-skipping transfer (“GST”) taxes for 2010, 2011 and 2012, with some generous modifications.
Summary of Selected Transfer Tax Provisions of the 2010 Tax Act
- Unification and Increase of Estate, Gift and GST Tax Exemptions. As a result of the Bush Tax Cuts, there were separate exemptions from Federal estate and GST taxes which rose to $3.5 million in 2009 and became unlimited in 2010, and a separate exemption from gift tax which remained at $1 million. Under the 2010 Tax Act, the exemption from gift tax remains at $1 million for 2010, but increases to $5 million after December 31, 2010, when the exemptions from estate, gift and GST taxes unify and increase to $5 million (with the GST exemption being indexed for inflation after 2012).
- Decreased Rates. Under the 2010 Tax Act, the estate, gift and GST tax rates are reduced to 35%, except that the GST tax rate for 2010 is zero (see “Planning Opportunities for 2010” below). If the Bush Tax Cuts had been allowed to expire, the estate, gift and GST tax rate would have returned to 55%.
- Election for 2010. Under the 2010 Tax Act, the executor of an estate of a decedent who died in 2010 may elect to be subject either to Federal estate tax, with a $5 million exemption, 35% tax rate on assets in excess of the exemption, and a full step-up in basis for the decedent’s assets for income tax purposes, or to the modified carry over basis regime that would have applied (with no estate tax) had the 2010 Tax Act not been passed.
- $10 Million Exemption Available to Married Couples. Beginning in 2011, each spouse has a Federal estate tax exemption of $5 million. If the first spouse to die does not make full use of his or her $5 million exemption, the executor may elect to make the unused balance available to the surviving spouse.
- Grantor Retained Annuity Trusts. Congress had considered imposing a minimum 10 year term on GRATs and requiring any transfer to include a taxable gift, but neither issue was addressed in the 2010 Tax Act.
Estate Planning Opportunities for 2010
- Direct Gifts to Grandchildren. Although the exemption from gift taxes remains at $1 million for 2010, in certain limited circumstances, taxpayers who are considering setting aside substantial assets for their grandchildren could save a significant amount of GST tax by making gifts in 2010 in excess of $1 million, paying gift tax and taking advantage of the 0% tax rate on generation-skipping transfers for 2010. Only outright gifts to grandchildren or to trusts only for their benefit would be eligible to take advantage of this planning opportunity.
- Grantor Retained Annuity Trusts. GRATs allow you to transfer the future appreciation on assets that you expect to increase in value in a tax efficient manner. How successful this technique is depends on (i) the term of the GRAT, (ii) the value of the assets contributed to the GRAT, (iii) the applicable interest rate in effect for the month in which the GRAT is created, and (iv) the actual performance of the GRAT assets over the term of the GRAT. The lower the applicable interest rate, the better. For December, 2010, that rate is 1.8%. In January of 2011, it increases to 2.4%. If you are considering using a GRAT to transfer future appreciation to your beneficiaries, you should consider doing so in the few remaining days of 2010.
- Charitable Gifts. Donors may make tax-free charitable gifts of up to $100,000 from individual retirement plans for 2010. Donations made in January, 2011 may be treated as if made in 2010.
The foregoing is only a summary of some of the changes made by the 2010 Tax Act and the planning opportunities available before the end of the year for those who may want to take immediate action. If you have any questions about your estate plan or what, if any, changes you should consider in light of the 2010 Tax Act, please call your Seyfarth attorney or any of the following experienced members of the Seyfarth Trusts and Estate Planning Group.
| New York | Chicago | Los Angeles |
|---|---|---|
| Douglas Allen (212) 218-5549 |
Anne E. Brynn (312) 460-5605 |
Patricia N. Chock (213) 270-9613 |
| Christopher Lagno (212) 218-5250 | Geoffrey F. Grossman (312) 460-5622 |
Mark T. Hansen 213) 270-9612 |
| Lawrence Mandelker (212) 218-5290 |
H. Debra Levin (312) 460-5630 |
Edward J. McCaffery |
| William B. Norden (212) 218-3316 |
Steven R. Lifson (312) 460-5828 |
John T. Rogers (213) 270- 9677 |
| Stephen L. Schar (312) 460-5649 |
Jadene M. Tamura (213) 270-9614 |
|
| Ronald Schreiber (312) 460-5651 |
Alan T. Yoshitake (213) 270-9696 |
To ensure compliance with requirements imposed by the United States Treasury Department in Circular 230, we inform you that any tax advice contained in this Bulletin is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.