Test Magazine Title March 2013 | Page 4

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Estate Tax Update:
Changes from the 2010 Tax Relief Act

a

mong the provisions for

individuals and businesses, the
Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation
Act of 2010 (2010 Tax Relief Act)
provides temporary changes to estate
and wealth transfer taxes.

Estate Tax Changes
Under tax reform enacted in 2001,
the Federal estate tax was gradually
reduced and disappeared altogether
in 2010, but it was scheduled to be
reinstated in 2011 at pre-2002 levels.
Under the 2010 Tax Relief Act, the
estate tax returns with a maximum
tax of 35% and an exclusion amount
of $5 million for 2011 and 2012 only.
The new law also eliminates the
modified carryover basis rules that
were in effect in 2010 and replaces
them with stepped-up basis rules.
Under stepped-up basis rules, the value of an inherited asset is “stepped
up” from the original purchase price
to the potentially higher market
value of the asset at the time of
inher itance, and heirs do not have
to pay capital gains taxes on any
increase in the asset’s value over the
decedent’s lifetime.

New Portability
Provision
The 2010 Tax Relief Act also includes a provision that allows the estate tax exemption to be transferred
between spouses in 2011 or 2012,

so that if one spouse dies and does
not use the full exemption amount,
the remainder can be used by the
surviving husband or wife, if he or
she also dies in 2011 or 2012.
To make use of this so-called
“portability” option, the executor of
the first spouse must actively elect
it on the estate tax return, even if
no liability is owed. Then, when the
remaining spouse dies, the heirs will
owe estate tax only on any amount
above the combined exemption.
For estate planning purposes, this
means that husbands and wives
do not have to split assets between
them, or be concerned about who
holds the title on various assets.

Gift Tax Changes
Starting in 2011, the gift tax is
reunified with the estate tax, with a
top tax rate of 35% and an exemption of $5 million.
While the annual
gift tax exclusion remains at
$13,000, this
change in the
lifetime exclusion
amount greatly
expands the potential for making
tax-free gifts to
family members.
However, keep
in mind that gifts
made in excess

of the annual exclusion reduce the
estate tax exemption.

GST Tax Change
Also starting in 2011, the
generation-skipping transfer (GST)
tax is equal to the highest estate and
gift tax rate in effect for the year. Thus,
for transfers to grandchildren made
in 2011 and 2012, the exemption
amount is $5 million with a GST tax
rate of 35%. While this tax is not
portable between spouses, couples
can combine their exemptions to give
away a total of $10 million without
incurring GST tax.
For more information about
changes in the estate tax and how
they may affect your estate plan, contact your professional advisors, including a qualified tax professional. ?

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