After much debate and last minute shenanigans, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act ("TRUIRJCA" or "TRA 2010" for short) was signed into law by President Obama on December 17, 2010. This new law provides sweeping changes to the rules governing federal estate taxes, gift taxes and generation-skipping transfer taxes, but only for the 2010, 2011 and 2012 tax years.
2011 and 2012 Changes to Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax Laws
Here is a summary of what TRA 2010 provides for gifts made in 2011 and 2012 and the estates of decedents who die in 2011 or 2012, as well as some problems created with regard to state estate taxes and generation-skipping trusts:
- Sets new and unified estate tax, gift tax and generation-skipping transfer tax exemptions and rates. For 2011, the federal estate tax exemption will be $5 million and the estate tax rate for estates valued over this amount will be 35%. The estate tax has also become unified with federal gift and generation-skipping transfer taxes such that in 2011 the lifetime gift tax exemption and generation-skipping transfer tax exemption will be $5 million each and the tax rate for both of these taxes will also be 35%.
- Indexes estate tax, gift tax and generation-skipping transfer tax exemptions for inflation in 2012. The estate tax, gift tax and generation-skipping transfer tax exemptions have been indexed for inflation for the 2012 tax year such that each will be increased from $5 million to $5.12 million beginning on January 1, 2012.
- Offers "portability" of the federal estate tax exemption between married couples. In 2009 and prior years, married couples could pass on up to two times the federal estate tax exemption by including "AB Trusts" or "ABC Trusts" in their estate plan. TRA 2010 eliminates the need for AB Trust planning or ABC Trust planning for federal estate taxes by allowing married couples to add any unused portion of the estate tax exemption of the first spouse to die to the surviving spouse's estate tax exemption. This will effectively allow married couples to pass $10 million on to their heirs free from federal estate taxes with absolutely no planning at all; however, note that the surviving spouse must file IRS Form 706, United States United States Estate (and Generation-Skipping Transfer) Tax Return, in order to take advantage of the deceased spouse's unused estate tax exemption. Also note that portability was not applied retroactively to January 1, 2010. Aside from this, as it now stands portability is only available for deaths that occur during the 2011 and 2012 tax years. In addition, without AB Trust or ABC Trust planning, state estate taxes may be due in states that collect them. See more on state estate tax issues below.
- State estate tax issues. To date, none of the states that collect a separate state estate tax have adopted portability of the state estate tax exemption between spouses, nor have I heard any discussion about portability becoming available in any state. So while portability may be relied on in states that do not collect a separate state estate tax, AB Trust or ABC Trust planning may still be required in states that collect state estate taxes, particularly in states where the couple has a large estate, the state estate tax exemption is less than the federal estate tax exemption, and state law allows for a separate state QTIP election. This will include couples who live in states like Maine, Maryland, Massachusetts, Minnesota, New York, Oregon and Tennessee where the state estate tax exemption is only $1 million, leaving a gap of $4 million in 2011 and $4.12 million in 2012.
- Generation-skipping trust issues. Unlike the estate tax exemption, the generation-skipping transfer tax exemption has not been made portable between spouses for the 2011 and 2012 tax years, nor have I heard any discussion about this becoming a possibility. Therefore, couples who want to take advantage of passing on up to two times the generation-skipping transfer tax exemption to their heirs in generation-skipping trusts will still need to include AB Trust planning or ABC Trust planning in their estate plans.