New Law Overview

The President signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Act") in December of last year.  The 2010 Act brings reductions to the Estate Tax, Gift Tax and Generation Skipping Tax for deaths or transfers of assets in 2011 and 2012 only. The 2010 Act will expire at the end of 2012, and Estate, Gift and Generation Skipping Taxes are scheduled to revert back to higher levels.


Estate Tax Law Changes

The Federal Estate Tax Exemption Amount has been increased to $5,000,000 per person for deaths in 2011 and 2012. The 2010 Act also has a new provision that in the event that one spouse doesn't fully utilize their Federal Estate Tax Exemption Amount, then the surviving spouse can utilize the unused Federal Estate Tax Exemption Amount at their death (commonly referred to as portability).

While important, the changes to the Estate Tax may not benefit you. First, you must pass away in 2011-2012 to take advantage of the 2010 Act Estate Tax law changes.  Also bear in mind that these changes only effect Federal Estate Tax - if you live in New Jersey or New York the exemption from state imposed estate taxes has not changed ($675,000 exemption per person from New Jersey Estate Taxes and $1million exemption per person from New York Estate Taxes).

Note that the 2010 Act is retroactive for estates of people who died in 2010.  Anyone who is dealing with the death of a family member in 2010 should be aware that the estate has an option of what tax law to apply and should seek tax advice.

How does this impact me?  In looking at your own existing estate planning documents and net worth, you need to bear in mind not only the increased Federal Estate Tax Exemption Amount for the next 2 years, but also the scheduled lower Federal Estate Tax Exemption Amount for deaths in 2013 and going forward, as well as any state level estate tax.


Gift Tax Law Changes

For the last decade, the ability to make a gift during your lifetime without paying tax has been limited to $1,000,000 per person.  Under the 2010 Act, for tax years 2011 and 2012 only, the Lifetime Gift Tax Exemption Amount has been increased to $5,000,000 per person and the gift tax rate has been deceased to 35%. This is in addition to your ability to make tax free gifts of $13,000 per person each year under your Annual Gift Tax Exclusion Amount.

How does this impact me?  For certain clients, such as those with significant assets or closely held businesses, the increase to the Lifetime Gift Tax Exemption Amount creates an opportunity to transfer assets at little or no transfer tax costs.  For older clients who might be comfortable transferring large portions of their assets to their children, this is a chance to make such a transfer on a federal transfer tax free basis, and possibly reduce state level estate taxes.


Generation Skipping Tax Law Changes

The Generation Skipping Tax Amount is an amount that you can transfer to your children in a trust that will be available to children and then pass to their children and so on without additional transfer taxes.  The 2010 Act increases the Generation Skipping Tax Exemption Amount to $5 million per person for deaths or gifts in 2011-2012 only.   It can be applied to lifetime gifts or transfers at death.  

How does this impact me?  For clients with assets they wish to see passed from generation to generation, such as real estate, a family business, or significant wealth, the changes to the Gift Tax and the Generation Skipping Tax create an unprecedented opportunity to transfer these assets in such as way that they will remain in the family and avoid transfer taxes from generation to generation, allowing you to cut Uncle Sam out of your estate plan.