2010 Tax Changes

The Tax Act of 2010 Changes Everything - For Two Years

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. The Act temporarily extended the "Bush Tax Cuts" and made sweeping and unprecedented changes to the Estate, Gift and Generation-Skipping Transfer Tax laws over the next two years. The Act also included provisions relating to the estates of persons who died in 2010 and made them retroactive to January 1, 2010.

Though there is no telling what Congress might do in the future, we now have some apparent predictability for at least the next two years, and we have brought some needed certainty in the administration of the estates of persons who died in 2010.

These historic changes are summarized as follows:

  1. The Act temporarily extended the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") by delaying the reinstatement of the estate, gift and generation-skipping transfer taxes as they existed in 2001 until December 31, 2012.
  2. For 2011 and 2012 only, the maximum Estate Tax rate is 35%, with an exemption amount of $5.0 million.
  3. For 2011 and 2012 only, the maximum Gift Tax rate is 35%, with an exemption amount of $5.0 million.
  4. For 2011 and 2012 only, the maximum Generation-Skipping Transfer Tax rate is 35%, with an exemption of $5.0 million.
  5. For 2011 and 2012, the "modified carryover basis" system is repealed, and is replaced by the traditional "stepped-up basis" system, for assets received from a decedent. For persons dying in 2010, a choice can be made to administer the estate under the old "stepped-up basis" system, instead of the "modified carryover basis" system that was in effect in 2010. The time to file estate-related tax returns is also extended to 9 months from the date of enactment.
  6. For persons dying after December 31, 2010, the Estate Tax Exemption (also known as the "Applicable Exclusion Amount") is increased by the unused Applicable Exclusion Amount of a person's predeceased spouse. In other words, until 2013, the Estate Tax Exemption amount has become "portable" and it is now possible to transfer this exemption amount to a surviving spouse, effectively creating an Estate Tax Exemption amount of $10.0 million.
  7. Tax free distributions to charities of up to $100,000 directly from IRAs are extended through December 31, 2011, and made retroactive to January 1, 2010, for IRA owners who are over age 70½ and are charitably inclined.

Unless Congress acts to further extend, modify or repeal these provisions, the Estate Tax, the Gift Tax and the Generation-Skipping Transfer (GST) Tax rates that were in effect in 2001 will return on January 1, 2013, as shown below:

Estate, Gift & GST Rates and Exemption Increases
YearTop Estate Tax RateEstate Tax ExemptionGift Tax ExemptionGST Exemption
2013 55% $1,000,000 $1,000,000 $1,000,000
2014 ? ? ? ?
If the Estate Tax Exemption is $5.0 Million
Why is Estate Planning Still Important?

The reinstatement of the Estate Tax with an individual exemption amount of $5.0 million means that, with proper planning, a husband and wife with a combined estate of $10.0 million or less generally need not be concerned about the Estate Tax. Even when the estate is larger than the Estate Tax exemption amount, the effective marginal tax rate of 35% is much less onerous than the 55% top rate that we have become accustomed to planning with.

So now that all but the largest estates are effectively exempt from the Estate Tax, why is estate planning still important?

Change is Inevitable

It is impossible to predict what Congress will do with the Estate Tax in the future. It is certain that the Estate Tax will be amended again. It is important that you have an estate plan that is flexible and kept current so that it will work as you intended.

Estate Planning Can Protect Your Assets

A fully funded revocable living trust can avoid probate upon your death. It can also avoid guardianship/conservatorship if you became too ill to manage your own affairs. Your estate plan can also ensure that your estate will pass what you have, to those you want to have it, how and when you want them to have it, saving every possible tax and administrative expense and keeping your personal financial affairs as private as possible.

Other types of trusts and estate planning techniques can be implemented to protect your assets from the reach of your future creditors.

Estate Planning Can Protect Your Loved Ones

A revocable living trust can ensure that your assets are managed and distributed by people you know and trust, preventing loss from mismanagement and mistakes from occurring. A living trust can also be designed to protect the assets you intend your loved ones to inherit from their creditors, their own immature spending habits, and from those who would take advantage of them.

Your estate plan can protect and preserve your estate if your spouse remarries after your death, and can ensure that your minor children will be raised and cared for by those you have chosen, with funding, guidance and instructions that you provide. If you have children from a previous relationship, or a child with a disability, your estate plan can ensure that they will be provided for as you direct, while preserving their eligibility for governmental assistance.

Estate Planning Can Protect Your Business

Your estate plan can ensure that your business will survive you intact and under the control of your chosen successors, preserving its value for your family. Estate Planning Can Protect Your Retirement Plan

What Should You Do Now?

The biggest problem facing estate planning attorneys is educating clients about what to do in this period of uncertainty. If an assumption about estate taxes that led to certain decisions in the estate planning documents later proves to be incorrect, it could have a very serious impact on the distribution of the estate. Increasingly, the job of the estate planning attorney is to help clients understand that proper estate planning has less to do with estate tax planning, and more to do with ascertaining the client's goals, educating them about the possibilities, and designing a coordinated and integrated plan that fits the client's particular objectives, while remaining as flexible as possible so that the estate plan can respond to changing tax rules. This temporary increase in the estate tax exemption has not eliminated the need for proper planning - it has merely shifted its focus.

What should you do now? First, find a competent estate planning attorney - one who is both thoroughly knowledgeable about the current law and who is also willing to spend the time needed to meet with you to ascertain your goals and learn about what is important to you. Next, make a commitment to participate in the estate planning process and see it to its fruition. Estate planning is a process, not a discrete transaction. A good estate plan needs to be comprehensive, yet flexible enough that it can be amended to keep pace with changes in your personal and family situations, as well as changes in the law.

If you already completed your estate plan, ask yourself, was your planning prepared by a competent professional? Has it been reviewed and revised in light of the recent changes in the law? Has it been reviewed in light of your current financial situation? Does your existing plan properly account for all of your current assets and liabilities? Does it do for you and your loved ones all that it can or should? You owe it to yourself and your loved ones not to overlook this critical component of your personal financial planning.