Merry Christmas From Your Friends in Congress and President Obama

As predicted in my last blog entry, President Obama and Congress were able to avert the estate tax disaster scheduled to occur on January 1, 2011 with the expiration of Bush Estate Reform passed in 2001. https://www.thewootenlawfirm.com/raleigh-business-law-blog/2010/12/temporary-estate-tax-deal/. On December 17, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 providing a temporary fix for estate tax reform. Below is a summary of the primary provisions.

1. Time Frame. First and foremost, this is a temporary fix only. The law passed expires in two years, so unless Congress does something during the next 24 months, we will be faced with the same chaos we faced as we approached the end of this year and the expiration of the Bush era estate tax reform laws. Hopefully Congress learned its lesson and won’t ignore the issue until the last minute this time.
2. Exemption Amounts. The new law allows an individual to pass up to $5,000,000 tax free. That means that a married couple can pass up to $10,000,000 tax free at death. Note that the gift tax exemption remains at $1,000,000, so you cannot give your assets away prior to death in anticipation of the inevitable law change in 2012. Note that the new law makes the exemption “portable” between married couples. That means that if one spouse dies and does not fully utilize his or her full exemption, the other spouse can pick up the balance on his or her estate tax return.
3. Tax Rates. The new law sets the estate and gift tax rate at 35%; substantially less than the 55% that was scheduled to be reinstated on January 1, 2011. The new rates apply retroactively to 2010, provided, however, that a decedent’s estate may elect to file under the old law, which had no estate tax at all. Because of the new basis rules discussed below, only the larger estates would have any incentive to elect out of the new law and file under the old law. The GST tax rate in 2010 is 0% and is 35% in 2011 and 2012.
4. Basis Rules. Under the new law, the full basis step up as it existed prior to 2001 is reinstated. That means that the heirs take a basis in the assets they receive from the decedent equal to the fair market value of the asset on the date of death. The effect of this is to eliminate at death all the tax on the appreciation of the asset during the decedent’s lifetime. Note that if an estate with a decedent that died in 2010 elects out of the new law, the estate will not get the full step up in basis. This is the cost of electing out of the new law and thus avoiding estate taxes altogether: an increased income tax liability upon the sale of assets inherited from the decedent.