Return of the Estate Tax Brings Tremendous Planning Opportunities
Under prior law, the estates of high net worth individuals who died in 2010 didn't pay any federal estate tax. With the recent enactment of the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010," that situation has changed.
Some of the new law changes and potential planning opportunities are discussed below.
New Laws
Estate Tax: Under the new law, the federal estate tax has been made mandatory for years 2010, 2011 and 2012 (with the ability to elect the prior no estate tax/carryover basis rules for 2010). It is imposed at the top rate of 35% of the estate's value and the exemption amount is $5 million per individual with a full step-up in basis allowed.
At a $5 million exemption level, the vast majority of estates (all but an estimated 3,500 nationwide in 2011) will not be subject to any federal estate tax, and the tax will raise about $11.4 billion in revenue. By way of comparison, a 55% tax with a $1 million exemption (what the Obama administration wanted to enact) would have resulted in about 43,500 taxable estates in 2011, raising about $34.4 billion.
Gift and GST Tax: For 2011 and 2012, the estate, gift, and generation skipping transfer (GST) tax exemptions have been reunified under the new law so that the $5 million exemption will be available for both lifetime gifts and the estate tax. However, for 2010, the gift tax exemption remained at $1 million. For gifts exceeding the exemption, the gift tax rate for 2010-2012 is 35%.
The exemption from the GST tax – the additional tax on gifts and bequests to grandchildren– will also rise to $5 million from the $1 million it would have been without the new law. The 2011 and 2012 GST tax rate for lifetime transfers in excess of $5 million is 35%.
See following comparative of exemptions and rates:
| Year | Estate & GST Tax Exemption | Estate Tax Rate | Gift Tax Exemption | Gift Tax Rate | Annual Gift Exclusion Amount |
| 2009 | $3,500,000 | 45% | $1,000,000 | 45% | $13,000 |
| 2010 | $5,000,000 (Or election-out) | 35% (Or 0% with election-out & carryover basis) | $1,000,000 | 35% | $13,000 |
| 2011/2012 | $5,000,000 | 35% | $5,000,000 | 35% | $13,000 |
| 2013 and future years | $1,000,000? | 55% | $1,000,000? | 55% | $13,000 |
Planning Opportunities
The 2011 and 2012 increase in exemptions will greatly enhance the gift, estate, and succession planning that previously would have cost transfer taxes at 55%. If you made gifts of $1 million prior to 2011, you can now make another $4 million of gifts to children or grandchildren with no transfer tax. This potential for increased gifts at a low rate opens up a two-year window for planning, but on January 1, 2013, the exemption amount is set to revert back to $1 million with a tax rate of 55% unless future legislative changes are made.
While the planning window for 2011 and 2012 is open, it offers a tremendous opportunity for individuals to turbo-charge their wealth and business transfers to the next generations.
We hope this information is helpful. If you would like more details about the estate, gift, and GST tax or any other aspect of the new law, please do not hesitate to call your BPM advisor.
This publication contains information in summary form and is intended for general guidance only. It is not intended to be a substitute for detailed research nor the exercise of professional judgment. Neither BPM nor any member of the BPM firm can accept any responsibility for loss brought to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.
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