Implementing the Estate and Gift Tax Changes Before 2013's Sunset
| Publication year | 2011 |
| Pages | 24 |
| Citation | Vol. 80 No. 4 Pg. 24 |
By Susan A. Berson
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010[1] (the Act) presents two years' worth of temporary changes for estate planners to use as tools in helping clients minimize their federal tax burdens. A new $5 million exemption, with a 35 percent tax rate, applies to 2011 and 2012 estates, and a special provision is available for estates of decedents in 2010.[2] The provisions of the Act[3] bringing change to estate and gift planning opportunities are detailed herein by year.[4]
I. Background
Just a few months ago, and for the first time since 1916, there was no federal estate tax. In 2010, taxpayers also received a reprieve from the generation-skipping transfer taxes,[5] along with a carry-over basis rule that calculated the basis in property received from a decedent as the lesser of carry-over basis, or the fair market value of the property on the date of death of the decedent.[6] For 2011 and 2012, the Act unifies the federal tax rates and exemption amounts for gift, generating-skipping and estate taxes; meaning, the maximum estate exemption is $5 million and the tax rate on gifts in excess of the $5 million exemption is 35 percent, same as the maximum estate tax rate, as shown below.
YEAR
ESTATE TAX
Max. Rate
Exemption
GIFT TAX
Max. Rate
Exemption
2011
35%
$5,000,000
35%
$5,000,000
2012
35%
$5,000,000
35%
$5,000,000
2013* 55% $1,000,000 55% $1,000,000 *Presumes Congress does nothing, whereby rates revert to pre-EGTRRA law on January 1, 2013.
The Act's consequence is that the amount an individual gifts under the lifetime gift tax exemption will reduce the amount of the exemption for estate and generation-skipping taxes for 2011 and 2012;[7] for 2013, uncertainty exists. Prior to expiration of the Act on December 31, 2012, a presidential election occurs. This will likely impact the legislative course estate planners will have to navigate.[8] Currently, the $1 million exclusion and 55 percent tax rate[9] of prior law will return effective January 1, 2013.
II. Provisions Applicable to 2010
For estates of decedents dying after December 31, 2009, and before January 1, 2011, a special election exists.[10] The executor of such an estate may elect an application of the carry-over basis provisions of Section 1022, instead of having the estate tax provisions of the new law applicable to 2010. Thus, the choice is either to: (a) pay the estate tax with a $5 million exemption, 35 percent maximum rate and receive a stepped-up income tax basis, or (b) pay no estate tax, yet receive carry-over basis subject to Section 1022. Any election would be revocable only with the consent of the IRS. Unless affirmatively electing option (b), the IRS will deem the estate to have chosen to pay the estate tax with the $5 million exemption applying.
Example of 2010 Special Election: Assume that John died on September 30, 2010, with an estate valued at $15 million. John was single. His executor can elect not to have the revived estate tax apply to the estate. So, free from the maximum estate tax rate of 35 percent, and the $5 million exclusion amount, the estate would not be subject to the estate tax, and the carry-over basis rules under Economic Growth and Tax Relief Reconciliation Act (EGTRRA) would apply to John's estate.
Practitioners should be prepared that this election involves an evaluation of all the factors that would ordinarily weigh on the decision of whether to elect carry-over basis. Evaluating what is best for the estate to do involves a calculation of the decedent's cost basis in individual asset items as well as future projections. At the very least, executors must gather information necessary to determine the basic tax costs of a future sale of estate assets.
To the extent a practitioner relies upon a computer program for calculations, be sure that it is updated to include provisions for entering the decedent's cost basis in individual asset items, allocating the Section 1022 basis increases to individual items, and projecting the tax cost of future sale of those estate items. Necessary projections of future tax costs of sale must account for: (i) depreciation recapture applicable to real estate, (ii) various forms of personal property, and (iii) various tax rates which will depend on the tax character of the asset being sold. Factors relating to the allocation of the basis increases include: (i) the marginal income tax brackets of each beneficiary, (ii) the allocation of the estate's assets among the beneficiaries, and (iii) the timing of any likely sale of the assets and whether the beneficiary intends to hold the asset until his or her death.
The earliest deadline for filing the carry-over basis Form 8939 is the later of nine months after the date of the Act's enactment (i.e., September 17, 2011, since enactment was December 17, 2010), or the regular due date. For deaths occurring from January 1, 2010, through December 16, 2010, the due date of estate tax returns for estates of decedents is also the same, no earlier than nine months after the date of enactment of the Act. The due date for making any disclaimers for such estates under Section 2518(b) is also the same.[11]
Regarding the 2010 gift tax exclusion, it remains at $1 million, with the maximum gift tax rate at 35 percent. Because the generation-skipping transfer (GST) tax rate is 0 percent, no GST tax will be payable with respect to gifts or deaths occurring in 2010. Finally, the Act extends the exclusion for qualified...
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