LETTER TO ESTATE AND TAX CLIENTS
Federal Estate and Gift Tax Revisions
To Our Clients:
On December 17, 2010, The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”) was signed. In addition to extending President Bush’s income tax cuts, the Act addresses the Estate, Gift and Generation-Skipping Transfer (“GST) tax laws for 2010, 2011 and 2012. The purpose of this letter is to provide a brief summary of the Estate, Gift and GST tax provisions in the Act.
The Federal Estate Tax
Under the Act, the federal estate tax exemption is set at $5,000,000 and the top estate tax rate is 35%. The $5,000,000 exemption amount will be indexed for inflation in 2012. Absent further legislation, in 2013 the exemption amount will be reduced to $1,000,000 and the top tax rate will once again be 55%. The Act reinstates the pre-2010 tax basis adjustment rules so that the beneficiaries of an estate receive a full “step-up” (or “step-down”) in income tax basis to the fair market value of the inherited assets as of the decedent’s death.
The Act also introduces the concept of “portability”. By way of background, under prior law, if an individual died and failed to utilize all of his/her gift and estate tax exemption, this exemption was forever lost. Under the Act, a surviving spouse will be able to utilize the unused exemption of his/her deceased spouse if the deceased spouse dies after 2010. This means that with respect to a married couple, if, in 2011, the husband dies and does not fully use his estate tax exemption, the unused exemption is then available to the wife so that when she dies her estate can use both her estate tax exemption and her late husband’s unused estate tax exemption.
The Federal Gift Tax
Under the Act, the most significant change with respect to the federal gift tax is that as of 2011 the gift tax exemption amount is once again “unified” with the federal estate tax exemption, meaning that the amount of the gift tax exemption increases from $1,000,000 to $5,000,000. Accordingly, as of 2011 an individual may make total gifts, in addition to annual exclusion gifts or direct transfers for medical or educational purposes, of up to $5,000,000 (reduced by any lifetime exemption previously used) during his or her life before having to pay any gift taxes. This $5,000,000 gift tax exemption is adjusted for inflation in 2012. As with the federal estate tax, absent further legislation, in 2013 the gift tax exemption amount will be reduced to $1,000,000 and the top gift tax rate will once again be 55%.
The increase in the lifetime exemption provides an opportunity for individuals to transfer a significant amount of assets during life without having to pay any gift tax. Doing so not only removes the gifted assets from the donor’s estate, but also removes all future appreciation (and of the income earned) on those assets. The concept of portability described above also applies to the gift tax exemption.
The Federal Generation-Skipping Transfer Tax
Under the Act, for 2010 and beyond, the generation-skipping transfer tax exemption amount is increased to $5,000,000 and is indexed for inflation in 2012. Absent further legislation, in 2013 the exemption amount will be reduced to approximately $1,360,000. The concept of portability does not apply to the generation-skipping tax exemption.
New Jersey Transfer Inheritance and Estate Tax
In addition to the Federal Estate and Gift Tax Law, New Jersey has two taxes that may apply upon a person’s death, the New Jersey Transfer Inheritance Tax and New Jersey Estate Tax. There will be no New Jersey Transfer Inheritance Tax if the estate is being distributed to Class “A” beneficiaries (spouse, children, issue of children, parents and grandparents of Decedent). A New Jersey Estate Tax Return will have to be filed if the Decedent’s gross estate exceeds $675,000, and if the taxable estate is more than $675,000, there will be New Jersey Estate Tax owed even though there may be no New Jersey Transfer Inheritance Tax due.
We suggest that you review your current estate planning documents to ensure that the higher lifetime and estate exemptions provided for under the Act do not substantially impact the disposition of assets under current documents, or create an otherwise avoidable Federal or New Jersey estate tax. We are available to assist you with any questions you may have.