Summary of new estate tax laws: H.R. 4853

By Julius Giarmarco

Giarmarco, Mullins & Horton, P.C.


On December 17, 2010, President Obama signed into law H.R. 4853, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This two-year tax extenders bill makes significant changes to the gift, estate and generation skipping transfer tax (GST).

Exemption and rate

For 2011 and 2012, H.R. 4853 sets the gift, estate and GST exemption at $5 million per person and $10 million per couple, with a tax rate of 35 percent. Thus, the estate, gift and GST exemptions are unified again for two years. The $5 million exemption amount is indexed for inflation beginning in 2012. But remember that these changes are for only two years. On January 1, 2013, unless Congress acts again, the gift, estate and GST tax exemption will be $1 million (adjusted for inflation) with a top tax rate of 55 percent.

Optional retroactivity for 2010 decedents

Estates of persons who died in 2010 will have the option of electing no estate tax with a modified carryover basis — i.e., a limited step-up in basis of $1.3 million, plus $3 million for property passing to a spouse — or a $5 million exemption with a complete step-up in basis. Any election would be revocable only with the consent of the IRS.

Gifts and generation skipping transfers

For 2010, the gift tax exemption remains at $1 million with a tax rate of 35 percent, and the GST exemption is $5 million with a 0 percent GST tax rate. For 2011 and 2012, the gift and GST tax exemption is $5 million per person and $10 million per couple, with a top rate of 35 percent. Since it's possible that in 2013, the estate, gift and GST exemptions might drop to $1 million (as adjusted for inflation) with a top rate of 55 percent, persons with large estates should consider using their $5 million gift and GST tax exemptions in 2011 or 2012.

H.R. 4853 clarifies that direct skips to trusts for grandchildren in 2010 will not result in the GST tax applying when distributions are made from the trust to the grandchild in later years. Therefore, it is possible (before year end) for a grandparent to transfer significant funds in trust for grandchildren, pay only a 35 percent gift tax and defer any estate tax until the grandchild's death. In any other year, the grandparent would have to pay GST tax of 35 percent in addition to the 35 percent gift tax. On the gift tax return reporting the 2010 transfer, the grandparent must opt out of the automatic GST allocation rules.
Portability of estate tax exemptions between spouses

For persons dying in 2011 or 2012, the executor of the estate may transfer any unused estate tax exemption to a surviving spouse — on a timely filed estate tax return. However, to prohibit "serial" marriages, only the most recent deceased spouse's unused exemption may be transferred by the surviving spouse.

Despite the relative simplicity of portability, there are several reasons for still using credit shelter trusts at the first spouse's death, including:
    1) the deceased spouse's unused exemption is not indexed for inflation;
    2) the unused exemption from the first deceased spouse will be lost if the surviving spouse remarries and survives his/her next spouse;
    3) the growth in the assets in the credit shelter trust are removed from the surviving spouse's estate;
    4) there is no portability of the GST exemption; and
    5) the credit shelter trust allows the deceased spouse to make certain that the assets in the credit shelter trust are managed and distributed according to his/her wishes (and not those of the surviving spouse).
Planning opportunities

The ability to gift $5 million — $10 million for a married couple — without having to pay a gift tax will allow high-net-worth individuals to put a huge dent in their estate tax bill. For example, a gift of $10 million by a married grantor to an intentionally defective irrevocable trust (IDIT) will permit a sale of $90 million dollars of assets to the IDIT at current historically low interest rates. Further estate tax reduction occurs because the grantor is now paying income taxes on the income generated by the entire $100 million in the IDIT.

Moreover, if the assets gifted and sold to the IDIT can be discounted — for lack of control and lack of marketability — the value that can be transferred via the IDIT is further expanded. Finally, further leverage of the gift and GST tax exemption can be accomplished by having the IDIT use a portion of its cash flow to purchase life insurance on the life of the grantor or the joint lives of the grantor and his/her spouse.

With every new tax law comes challenges and opportunities. The 2010 Tax Act offers plenty of both.