Sunday, December 26, 2010

Tax Relief Act of 2010: It Finally Happened

Well, no one would have predicted this!

Essentially, Congress had ten years to provide some certainty to the U.S. Federal Estate and Gift tax system. Incredibly, with the Democratic Party in control of both houses of Congress and the White House, the Estate tax was allowed to lapse completely in 2010. As 2010 wore on, there were periodic statements of what should happen to the law, should there be a retroactive bill? Would the law really be allowed to return to the 2001 standard, with high rates and only a $1,000,000 exemption?

Then, the mid-term elections occur and we have divided government again. Yet now, with a technical "lame duck" congress, incredibly, a new tax bill emerges!

And what a bill! In addition to extending the Bush tax cuts on the income tax side (along with some very interesting temporary adjustments to the Social Security withholding tax), the Tax Relief Act signed into law on December 17, 2010, lowers estate, gift and generation-skipping transfer (GST) taxes for a two-year period.

Here are some of the estate and gift highlights of the Act:

■ The estate tax will be reinstated for 2011 and 2012 with a top rate of 35 percent. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years.

■ Estates of people who died in 2010 can choose to follow either 2011 or 2011's rules. The estate may choose between an estate tax based on the $5 million exemption and a step up in basis of the estates assets, or no estate tax and a modified carryover basis in the estates assets.

■ For gifts made after December 31, 2010, the Act reunifies the gift tax with the estate tax, allowing for an exclusion of $5 million and the 35% tax rate. For gifts made during 2010, the exclusion amount is $1 million and the maximum tax rate is 35%.

■ The generation skipping transfer tax exemption for gifts made or decedents dying after December 31, 2009 will be equal to the applicable exemption for estate tax purposes. Transfers made during 2010 subject to the generation skipping transfer tax are subject to a tax rate of 0%, and will be subject to a rate of 35% for transfers in 2011 and 2012.

■ In addition, the TRA allows for the estates of decedents dying after December 31, 2010 to elect to transfer the unused portion of the $5 million exclusion to a surviving spouse.

Aside from the fact that a $5 million estate tax exemption per person, or $10 million per couple, is good news, there are many other planning opportunities raised by this new bill, many of which are caused by the fact that the gift tax exemption will now also be $5 million per person. This is the huge difference between the law since 2001 and now. Under prior law, with the gift tax exemption at $1 million, many clients who could otherwise afford to do so (from a financial perspective) could not make gifts to children or grandchildren. Now, there are many gifts which can be made, in trust or otherwise, and the parent/donor will not owe tax.

Perhaps the most surprising part of the Act is that estates of people who died in 2010 can elect to use either the new rules or the "old" rules. This addresses the situation in which an estate may owe significant capital gains tax even though no estate tax is owed. This is a surprising change because many times such inconsistencies are allowed to remain in the tax code because there is not much in the way of political capital to simply fixing an inconsistency. We have several estate matters which will be affected by this part of the Act.

The fact that the Act is in place for only two years is interesting. Perhaps Congress has realized that having these "deadlines" in place actually helps when it comes to compromise. We will see in two years' time.

Posted by
Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney. For a complimentary 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.

He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Probate Litigation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his offices are conveniently located for clients in the Los Angeles, Orange, Santa Barbara, Riverside and San Bernardino Counties.

The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office. The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. Telephone: (626) 793-3210.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878. Telephone: (818) 769-4221.