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The New Estate Tax Legislation

The new estate tax legislation, passed by Congress on December 17, 2010, will greatly change the estate tax as we have known it.

  • The key feature of the legislation is to provide a $5,000,000 estate tax credit shelter for each person ($10,000,000 for a husband and wife) instead of the $1,000,000 credit shelter that would have become effective on January 1, 2011.  The $5,000,000 estate tax credit shelter is made effective retroactively to January 1, 2010.   The $5,000,000 credit shelter will be indexed for inflation beginning in 2012.
  • There will be “portability” of the estate tax credit shelter exemption between spouses if the first spouse to die does not use all of his or her exemption.  In other words, you will be able to leave your entire estate to your spouse together with your unused credit shelter so that the surviving spouse will have $10,000,000 of credit shelter exemption available.
  • The maximum estate tax rate will be capped at 35% (instead of the 55% rate which would have gone back into effect on January 1, 2011).
  • The gift exemption will remain at $1.0 million for 2010 but will be unified with the estate credit shelter exemption (i.e., $5.0 million) beginning in 2011. The rate on taxable gifts in excess of the credit shelter exemption is the same maximum 35% rate.
  • The generation skipping transfer tax rules will apply to 2010 “GST transfers” but the GST tax rate is zero. The GST exemption will be equal to the estate tax exemption, so there will be $5.0 million of GST exemption for 2010 that can be allocated to 2010 transfers.
  • Direct skip gifts in trust or “taxable distributions” in further trust for grandchildren or more remote descendants in 2010 will incur no current generation skipping transfer tax and will not create the potential problem of having the GST tax apply to later distributions from the trust to the grandchild.

There is a special transitional rule for the estates of persons who died during 2010.  Such estates may choose to proceed under the new law with a $5,000,000 credit shelter and a full “step up” in basis or the may elect to proceed under the 2010 estate tax repeal which will require a “carryover” basis for estate assets in excess of $1,300,000 (with an additional step up for gifts to a spouse).

The increase of the estate tax credit shelter exemption to $5,000,000 ($10,000,000 for a husband and wife) will eliminate federal estate tax concerns for many readers who may, in the past, have structured their estates to create “credit shelter” trusts rather than make marital gifts to a spouse.  The increase of the “credit shelter” amount may have the effect of eliminating desired gifts to the spouse and readers may wish to change their documents to assure that spousal gifts will be made.

The availability of the opportunity to carry over a deceased spouse’s unused estate tax credit shelter may also eliminate or reduce the need for credit shelter planning for the first spouse to die.  Gifts to the surviving spouse may be more attractive as a planning opportunity.

The increase of the estate tax credit shelter exemption may also alter your perceptions about the desirability of making lifetime gifts.  The increase of the credit shelter exemption and the availability of a step up in the basis of assets passing at death may be an incentive to hold assets rather than transfer them by lifetime gift.

The increase in the generation skipping transfer tax exclusion may make the idea of multi-generational “dynasty trusts” more attractive.

The State of Maine has not at this point increased the Maine estate tax credit shelter to match the new federal exemption equivalent.  Maine will still impose its estate tax on estates in excess of $1,000,000.  Accordingly, you will want to make some provision to use the available Maine exemption.

We recommend that you contact your tax and estate planning attorney as soon as possible to review your current Wills and Trusts and consider whether any changes need to be made. If you do not have an attorney, I would be happy to assist. You can learn more about my work and expertise on my Phil Hunt webpage.