Publications: Estate, Gift and GST Tax Changes under the 2010 Tax Relief Act

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Relief Act”) makes sweeping changes. For example, the lifetime gift exemption increased from $1,000,000 to $5,000,000, the highest it has ever been, providing powerful new opportunities for transfer planning. The Act also introduces a new “portability” feature which allows a surviving spouse to take advantage of the unused exemption of a predeceased spouse. This portability allows spouses to effectively use a combined $10 million exemption without the need to transfer assets between spouses to assure efficient use of each spouse’s exemption. These are positive effects of the new law. However, the 2010 Tax Relief Act may also produce some negative or unwanted results. For more than 50 years it has been common practice to use a mathematical formula to divide the assets of a married couple to maximize estate tax savings when the first spouse dies. Formulas also have been used to provide funds for charitable causes and to benefit children and grandchildren. After the 2010 Tax Relief Act, these formulas may no longer produce the intended results.

Below is a brief summary of the relevant changes for your reference:

                                            Estate Tax            Gift Tax            GST Tax

2011-2012 Rates                 35%                       35%                  35%

2011-2012 Exemptions       $5 million                $5 million          $5 million

Scheduled 2013+ Rates       55% and                 55% and           55% and
& Exemptions                      $1 million                $1 million          $1+ million
(pre-2002 gift, estate
and GST tax laws)

Estate Tax

• Estate tax exemption of $5 million (indexed for inflation for individuals dying in 2012) and a top estate tax rate of 35%.
• For married couples, allows the surviving spouse to use any unused estate tax exemption of a spouse who dies in 2011 or 2012. This “portability” allows spouses to effectively use a combined $10 million exemption.

Gift Tax

• $5 million gift tax exemption (indexed for inflation for gifts made in 2012).

GST Tax

• $5 million GST tax exemption (indexed for inflation for transfers in 2012) and a top GST tax rate of 35%.

Sunset of the Gift, Estate and GST Tax Laws

The provisions of the 2010 Tax Relief Act relating to estate, gift and GST taxes are temporary. Absent further congressional action, these provisions are scheduled to expire at the end of 2012, at which time the pre-2002 gift, estate and GST tax laws will apply.

We recommend that all clients review their estate plan to determine how the 2010 Tax Relief Act will affect their existing documents.

For more information about the content of this update, please contact your Ungaretti & Harris attorney.