When the President signed into law a two year extension of the Bush Tax cuts, most Americans were focused on the income tax ramifications. However, the gift and estate tax changes are a huge departure from what the estate planning community expected. The options were believed to be a 45 percent or 55 percent estate tax rate, applying to assets exceeding $3.5 million or $1 million. But the law applicable for the next two years is vastly different from those expectations. Among the highlights are the following:
-- For 2011 and 2012, a $5 million exemption amount, meaning a single person can pass $5 million upon death without any federal estate tax. A married couple with proper planning can protect $10 million.
-- Just as significant, the amount a person can gift during lifetime is $5 million. This is a radical departure from the current $1 million gift amount. The significance is that 2011 is a year when substantial wealth can be transferred without incurring any gift tax. For the very wealthy, assets in excess of $5 million can be transferred with only a 35% gift tax. Also, with a $5 million gift exemption amount ($10 million for a married couple), advanced gifting techniques, such as transfers involving a gift and sale of assets to intentionally defective trusts, are even more useful.
-- The Generation Skipping Tax Exemption is also $5 million. Again, using advanced planning tools, there is an opportunity to provide significant estate tax savings for future generations.
-- The law also addressed the uncertainty pertaining to taxpayers who die in 2010. The decedent's estate may elect the $5 million exemption amount, or benefit from no estate tax but also no step-up in basis for assets exceeding $1.3 million (and an additional $3 million increase in basis to property that goes to the decedent's spouse). Generally, estates under $5 million will benefit from the $5 million exemption amount, and estates such as George Steinbrenner's will benefit from no estate tax.
Some planning decisions are immediately obvious and others will emerge as the new law is studied. Despite the abundance of good news, there is remaining uncertainty: the law only applies for two years. But two years provides ample time to take advantage of the planning opportunities.
Santa - I mean the President and Congress - was very generous this Holiday Season.