Estate & Gift Tax Changes--Significant but Temporary

By: Laurie Valentine-Trust Counsel & Chief Operating Officer

The federal tax legislation signed into law on December 17, 2010, includes significant changes to the federal estate and gift tax laws. Unfortunately, those changes are not permanent---they are only effective for estates of persons who die in 2011 and 2012.

The federal estate tax exemption amount (the amount that you can pass to anyone any way at your death) has been increased to $5 million and the federal estate tax rate has been lowered to 35%.

The new law includes a provision allowing “portability” of any unused portion of the deceased spouse’s estate tax exemption to the surviving spouse. Under prior law, each spouse had to use all of their own federal estate tax exemption or lose it. That was usually accomplished by including a bypass trust to hold the deceased spouse’s exemption amount in trust for the surviving spouse. The new portability provision allows the executor of the estate of a spouse who dies in 2011 or 2012 to transfer the unused portion of the federal estate tax exemption to the surviving spouse without the creation of a bypass trust.

The unlimited step-up in federal income tax basis of inherited assets has been reinstated. Heirs who inherit assets or property that have increased in value from what the decedent paid for them get a “step-up” (increase) in the cost basis of those assets to their date of death fair market value.

Federal estate and gift tax rules have been re-unified. The federal gift tax exemption has increased from $1 million to the same amount as the estate tax exemption ($5 million) for gifts made in 2011 and 2012 and the gift tax rate for gifts above the exemption amount is the same as the estate tax rate (35%).

Now is the time to review estate plans created under prior federal estate and gift tax laws. Bypass trusts and other provisions required to save taxes under prior law may no longer be needed as a result in the significant increase in the federal estate tax exemption amount and the new exemption portability provision. Consult your estate planning adviser to ensure you have a plan the accomplishes your estate planning objectives.

The information in this article is provided as general information and is not intended as legal or tax advice. For advice and assistance in specific cases, you should seek the advice of an attorney or other professional adviser.