Prior to the 2010 act titled Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the federal estate and generation – skipping transfer taxes have been repealed during 2010 by reason of the provisions of the "economic growth and tax relief reconciliation act of 2001", the gift tax remained. With that repeal came changes to the federal income tax rules for all Montgomery County estate lawyers, such that there was to be limited "step up" in income tax basis upon the death of a taxpayer. But 2001’s repeal of the federal estate, gift and GST taxes, and corresponding income tax changes,were scheduled to expire on December 31, 2010.
Upon expiration, the federal estate and GST taxes were to return via the revival of the pre-2001 law, with a modest exemption from the federal estate and GST tax of $1 million per individual, and with a top estate, gift and GST tax rate of 55%. All that changed with the enactment of the 2010 act. The federal estate in GST taxes have been reinstated effective January 1, 2011, and the gift tax remains. However, the estate, gift and GST tax regime under the 2010 act is quite different than it was prior to 2010.
The key components of the new structure or is follows:
1) The estate, gift and GST tax rates are reduced to 35%, as compared to a top rate of up to 45% under EGTRRA and 55% under pre-2001 law.
2) There is an estate and GST tax exemption amount of $5 million per individual (and up to $10 million for married persons), as compared to $3,500,000 in 2009 under 2001, and $1 million under pre-2001 law.
3) The gift tax exemption is once again "unified" with the state and GST tax exemption, such that the gift tax exemption is also $5 million. This is in contrast to the $1 million exemption that had been in place under 2001, and now allows for greater gifting of assets during lifetime without incurring gift tax.
4) The $5 million estate tax exemption amount is "portable" between spouses, which is in stark contrast to prior law. Under prior law, the exemption was not portable. As a result, under prior law, the decedent would need to leave assets in trust for the surviving spouse (a so-called "bypass" or credit shelter" trust) if he or she wanted to benefit the surviving spouse and get the use of the decedent's estate tax exemption. With portability, such trusts are not necessary to preserve and use a pre-deceasing spouse's estate tax exemption.
5) The $5 million GST tax exemption is not portable, so that transfers to trusts or direct transfers to grandchildren will be necessary to utilize a pre-deceasing spouse’s GST tax exemption.
8) But, all the foregoing provisions expire on December 31, 2012, and the provisions of 2001 return on January 1, 2013. This would bring a $1 million estate, gift and GST tax exemption, though the GST tax exemption would be adjusted for inflation using 2001 as a base year. It would also bring the return of a top tax estate, gift and GST tax rate of 55%.