January 2011 "Tax Relief in the Nick of Time"
PLANNING FOR WEALTH & SECURITY
TAX RELIEF IN THE NICK OF TIME
By Jennifer & Jeff Hawkins, Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers
Democrats and Republicans in Washington have played a game of "chicken" since 2001 and agreed to swerve for two years before colliding again during the Presidential election. The new Tax Relief, Unemployment and Insurance Reauthorization and Job Creation Act of 2010 (Tax Relief Act) extends economic stimulus to Americans and extends and increases tax relief that was established in 2001. This article summarizes highlights of the new law, including new tax relief from estate, gift, generation skipping transfer, and capital gains tax.
The tax law established in 2001 called for the federal estate tax exclusion or exemption amount to drop from a high level of $3.9 million in 2009 to $1 million effective January 1, 2011. Many people, such as family farmers with wealth tied up in fixed assets such as farmland, worried that the reduced federal estate tax exemption would force their families to sell assets and pay the tax. The Tax Relief Act increases the exemption to an all time high of $5 million until the end of 2012. The new "portability" feature of the Tax Relief Act provides that a surviving spouse of a person who dies after January 1, 2011, may retain the unused portion of the deceased spouse's estate tax exemption in addition to the surviving spouse's own exemption.
Estates of extremely wealthy decedents who died in 2010 can elect to be treated under the old law. This election would eliminate all estate tax and generation-skipping transfer tax, so you can see why some large estates would choose this election. As a trade-off, the heirs receive assets with a capital gains tax basis that is more or less equal to the decedent's tax basis. For heirs who sell inherited assets with low capital gains tax basis, when they sell the assets they must pay capital gains tax on the amount of the asset value that exceeds the basis. More treatment of capital gains tax appears below.
The federal gift tax and federal estate tax shared exemptions until 2001. The 2001 law separated the two taxes, freezing the gift tax exemption at $1 million, and allowing the estate tax exemption to gradually increase over the past decade. The Tax Relief Act reunifies the estate tax with the gift tax by setting the exemption levels for each tax at $5 million. Therefore, a person can give away up to $5 million between January 1, 2011, and December 31, 2012, or the person can keep the assets and allow them to pass through his or her estate during that two year window. Likewise, the relatively obscure generation-skipping transfer tax, which discourages wealthy people from saving taxes by skipping generations in their estate plans, now has a $5 million exemption also.
Capital gains tax laws remain the same as they existed up until December 31, 2009. The previous law curtailed the capital gains tax relief in 2010 that estate beneficiaries had enjoyed for decades, but the new law restored that relief for all estates, including estates of people who died in 2010. Thus, heirs receive fair market tax basis in inherited assets as if they had purchased the assets from the estate and they only pay capital gains tax on asset values that increased after the decedent's death if the heir sells the assets.
Many estate plans written within the past several decades include language that was designed to protect estates from very small federal estate tax exemptions and that language may be too restrictive in today's high exemption environment. Other changes in legal and economic conditions render many estate plans prepared more than 5 years ago obsolete. Thus, it pays to ask an experienced trust and estate lawyer to evaluate your plan every five years or so.
© 2011 by HAWKINS LAW PC, Estate, Trust, Elder Law & Business Attorneys. All rights reserved. Published with permission.