Tuesday, December 21, 2010


Like the “Bush” tax cuts, the federal Estate Tax has only been extended through December 31, 2012 by The Tax Hike Prevention Act of 2010. However the extension begins with decedents who go to their final audit after December 31, 2009 – thereby reinstating the Estate Tax for 2010.

The Estate Tax exemption is increased to $5 Million and the top rate is reduced to 35%.

The Act also provides for “portability” of the $5 Million exemption between spouses beginning in 2011. This means that a surviving spouse can elect (on a timely filed Estate Tax Return) to add the unused portion of the deceased spouse’s exemption to their $5 Million exemption – allowing married couples to take full advantage of $10 Million in exemptions.

In his post “Bush-Rate Extension Passes; What It Means” Joe Kristan quotes Estate planning attorney Wayne Reames on the impact of this “portability” –

As we think about it, portability is going to create more work, not less. First, portability only applies if the first-to-die files an estate tax return. Thus, we’ll have to file returns for all these people with less than $5M.”

So if a surviving spouse wants to be able to take advantage of the unused exemption of a deceased spouse, a federal Estate Tax return will have to be filed for the first spouse to pass, regardless of whether or not one is required.

With the return of the federal Estate Tax also comes the return of unlimited “step-up” in basis for all inherited property. Thank the Lord!

The estates of decedents who passed in calendar year 2010 have a choice -

* The estate can elect not to be covered by the new Estate Tax rules (treated as if there was no Estate Tax), with stepped-up basis limited to $1.3 Million in assets. Or

* The estate can elect to be covered under the new Estate Tax regime, with a $5 Million exclusion, 35% top rate, and unlimited step-up in basis.

How and when the choice is made is to be determined by the Internal Revenue Service.

Thankfully, beginning with taxable gifts made after 2010, the federal Gift Tax is once again matched to the Estate Tax, with a “lifetime exclusion” of $5 Million, the same as the Estate Tax exemption, and a top rate of 35%. For gifts made in 2010 the top rate is 35%, but the lifetime exclusion is only $1 Million.

Unlike the Democrats (I do not consider myself either a Democrat or a Republican, as the elected officials of both parties, following the written scripts of their party, have proven to be, for the most part, idiots) I have no problem with this new Estate Tax. I have only one client couple who could actually have a taxable estate, although maybe not when the portability between spouses is considered. I am delighted that once again there is an unlimited step-up in basis for inherited property, and the Gift Tax lifetime exclusion matches the Estate Tax exemption.



2020 financial consulting said...

This is a nice explanation of the tax. Nice thing that you posted this for awareness.

Peter Reilly said...

The act also put in a 0% generation skipping tax rate for 2010. This has all big time estate lawyers scrambling to take advantage. They will be having a busy week. The loophole is applicable to trusts that would be subject to GST in the future and people with net worth over 10,000,000 who want to have dynasties.