Good and Bad News on Estate Taxes

Lee Poteracki

As estate planning practitioners, we have been concerned about how Congress would react to the expiration of the Estate and Gift Tax at the end of 2009. We knew the date was approaching for years, and were certain Congress would not allow the taxes to expire. Somehow, the politics of 2009 prevented Congress from fixing the problem, and we have been without an estate or gift tax throughout 2010. Finally, in December of 2010, Congress has acted.

The earliest “estate tax” in the United States was a stamp tax enacted in 1797. A true estate tax was adopted during the Lincoln administration as the “Tax Act of 1862″ to assist in paying the costs of the Civil War, and this tax was upheld by the Supreme Court in an 1874 case. The Estate and Gift Tax that has been imposed in roughly the current form was part of the Revenue Act of 1916. The 2010 hiatus in the Estate Tax was part of the Bush administration’s attempt to repeal the tax. If Congress had not acted, while there was no estate or gift tax applicable in 2010, beginning in 2011, estates in excess of $1 Million would have been subject to estate taxes reaching 55%. Also, a valuable capital gains tax benefit was severely restricted by the proposed law.

Congress has acted to TEMPORARILY change the estate and gift tax system effective for 2010, 2011 and 2012 only.

2010-2012 Estate Tax Changes

The signature feature of the law is to set the gift and estate tax unified exempt amount at Five Million Dollars. While the law retroactively makes the taxes applicable beginning January 1 of 2010, the new law also permits estates of persons who died in 2010 to opt out of the new tax law, and instead enjoy the “no-tax” status which applied in 2010 before this law was passed.

While it may seem an obvious decision to opt out of the new tax law and have a “no-tax” status, the cost of this election is to forego the capital gains benefits (“step-up in basis”) restored under the new law. Thus, for estates well under $5 Million, it may be wise to NOT opt out of the law to take advantage of the capital gain tax benefits. Our trust and estate administration attorneys will be evaluating these choices as the regulations for the new law are issued.

2011-2012 Gift Tax Changes

Prior to the December 2010 legislation, the gift tax exempt amount was limited to $1 Million, even in 2010, when there was no applicable estate tax. Under the new law, the exempt amount has increased five-fold to $5 Million. This increase in the exemption amount presents an excellent opportunity to make planned lifetime gifts.


Another interesting feature of the new law is that married taxpayers can enjoy flexibility in using each spouse’s $5 Million exemption. Thus, if the first spouse to die has less than $5 Million in assets, the unused part of his or her exempt amount is added to the $5 Million exemption of the surviving spouse. This is unprecedented in estate tax history.

The foregoing are all positive developments for our clients. However, other than gifting opportunities in the next two years, the bad news for our clients is found in the word TEMPORARILY. While no tax law changes are forever, this one is especially fleeting, in that the estate tax laws are scheduled to revert to the $1 Million scheme at the end of 2012. We again will be advising our clients that we look to Congress for another repair job by then.

We look forward to answering any questions you may have as to any planning opportunities offered by this roller coaster tax law ride.

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