2010 Tax Relief Act: 
Finally, Some Certainty 
in the Estate and Gift Tax Area

Perhaps that certainty is only for the next two years because in what seemed to be an 11th-hour decision, President Obama signed the Tax Relief, Unemployment Insurance Reauthorizations and Job Creation Act of 2010 (the act) on December 17, 2010.

Among several provisions, we now know that for the next two years, you and I will continue to benefit from lower income tax rates with the extension of the Bush-era tax cuts. We also learned that for 2011, the employee’s portion of Social Security taxes has been reduced from 6.2% to 4.2% for wages earned.

These were just a few of the major provisions passed in hope of creating economic growth and setting the stage for a full economic recovery. For example, experts are estimating the new payroll tax savings will inject over $110 billion into the U.S. economy. Also, at a bargain price of just over $239 billion, the extension of the Bush-era tax cuts will hopefully leave more money in our pockets, which, in turn, will generate jobs and stimulate the economy.

The Real Impact

Regarding the act, it is somewhat surprising that the generous provisions in the estate and gift tax area have gone relatively unnoticed. Planning in this area had been somewhat put on hold with the repeal of the estate tax in 2010 and with its anticipated return in 2011. The new act finally provided some clarity in a time of uncertainty (well, for the next two years that is).

The act’s major gift and estate tax provisions include the following.

  • For decedents dying in 2010, executors now have a choice. The default rule is that the estate tax will retroactively apply to 2010 with a $5 million estate tax exemption and a 35% tax rate. To add more complexity, the executor can opt out of the estate tax but suffer the consequences of having limited step-up tax basis when inherited assets are ultimately sold.
  • The $5 million threshold will continue for 2011 and 2012. This increase is significant when compared to the $3.5 million exemption that existed in 2009 and the $1 million threshold that was scheduled to resume in 2011.
  • The estate tax exemption for a deceased spouse is now portable, meaning the surviving spouse can use the remaining estate tax exemption of the “last deceased spouse.”
  • The lifetime gift tax exemption has increased from $1 million to $5 million. This presents many planning opportunities for taxpayers to transfer more wealth during their lifetimes without paying gift tax. Taxpayers now have an opportunity to reduce the size of their estates by making gifts (up to $5 million less any used gift exemption) to heirs free of gift and GST tax. When combined with the use of valuation discounts, the potential for wealth transfer is even greater. In fact, some experts are predicting that over the next two years, we will experience the greatest amount of wealth transfer in U.S. history.

Because most of the provisions in the act phase out after 2012, timing will be important. At this point, our crystal ball looking beyond 2012 is cloudy at best. Unless further legislation is forthcoming, these generous opportunities for wealth transfer will end since we are set to return to a $1 million unified estate and gift tax exemption and a 55% tax rate after December 31, 2012.

Jeff Anderson is a partner in the Padgett Stratemann & Co. tax department and has been part of the Austin team since 1989 He brings a diverse background that combines sound income tax, estate tax and financial planning that guides clients to reach their economic potential. Beyond traditional tax services, Jeff assists clients in identifying areas negatively affecting profitability and growth, and develops solutions that are practical and technically sound. In addition to acting as a sounding board for management, he provides comprehensive, flexible strategies that address the issues affecting your business.

MD News March/April 2011, Austin



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