Christmas May Come Early for Estate Tax Relief

Guy S. Emerich, Attorney
Guy is Board Certified by The Florida Bar in Wills, Trusts and Estates. His practice focuses on estate planning, probate, trust administration and real estate law.

At this writing, legislation is pending in Congress to make significant changes to the existing federal estate tax law.  Hopefully what is noted below will in fact be the law.  However, there is a giant caveat and that is that all, none or some of the following information may not become law.  It is hoped by most estate planners and believed by many that the followinng will be the new law.

Here are some of the major changes:

• The federal estate tax comes back, is applied retroactively for estates of decedents dying in 2010 and carries with it a $5 million exemption.  This amount would be indexed for inflation.  What is also significant is that the rate would be 35%, as opposed to the 2009 rate of 45%.  An interesting part of this retroactivity is that an executor can elect not to have the tax apply.  Instead, the executor can elect to have modified carry-over basis apply to estate assets, meaning that assets would not get a stepped-up basis at death.  Instead, the basis is the lower of the fair market value of the asset or the basis in the hands of the decedent.  However, there is permitted the allocation of $1.3 million of appreciation for non-spousal beneficiaries and $3 million for spousal beneficiaries.
• The gift tax exemption becomes $5 million for gifts in 2011 and following, but stays at $1 million for gifts in 2010.  The rate is also 35%.
• The Generation Skipping Tax rate for 2010 would be zero.  However, since the Generation Skipping Tax exemption is equal to the estate tax exemption, there is $5 million of GST exemption that can be allocated to transfers this year.
• A new concept is portability.  Simply put, to the extent the estate tax exemption is not used by the first spouse to die, it can be carried over and used by the surviving spouse.  In theory, if never used by the first spouse, the second spouse would have $10 million of exemption.