Estate Tax Alert
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. This Act temporarily reforms the Federal Estate, Gift and Generation Skipping Transfer Tax laws retroactive to January 1, 2010 and until December 31, 2012.
Below is a brief summary of the Act and some planning opportunities.
The Federal Estate Tax exemption amount is increased to $5 million adjusted for inflation to 2012. Any amount over the federal tax exemption amount is taxed at the rate of 35%.
The Federal Estate, Gift and GST taxes are once again unified, meaning the lifetime exemption for gift tax purposes is also $5 million with any lifetime transfers over that amount taxed at the rate of 35%.
The GST (Generation Skipping Tax) exemption amount will also be $5 million for 2011 and will be indexed for inflation in 2012. The GST tax rate will also be 35%.
The Federal Estate, Gift and GST tax exemptions will be portable between spouses. That means that a surviving spouse retains the unused estate, gift and GST tax exemption amount from a deceased spouse dying after 2010. This will allow many clients to take advantage of the increased exemption amounts without the need to transfer assets between spouses. However, the use of a “credit shelter trust” to hold the assets sheltered by the estate and gift exemption amounts at the death of the first spouse will still be a useful tool for many taxpayers because of (a) the ability to shield such assets from creditor claims and (b) the ability to transfer the trust assets, together with the growth thereon, free of federal estate tax at the surviving spouse's death. For this reason, we are still drafting Wills that contain these bypass trusts.
Finally, none of the changes in the act affect annual exclusion gifts. These gifts can still be made at the rate of $13,000 per recipient.
This major, although temporary, overhaul of the Federal Estate, Gift and GST tax schedule enhances and creates a multitude of opportunities to transfer significant wealth in a tax-free or tax-efficient manner. All clients should undertake a review of their current estate plans including the titling of assets between spouses. Please contact Stacey Willits McConnell in the Estates Department at Lamb McErlane (610-701-4431) to schedule an appointment to review your plan and ensure that your personal estate planning goals are still met.