If you think about it, every major life event has an associated tax implication. The birth of a child leads to an additional exemption on your personal tax return, marriage results in a changed tax filing and withholding status, and death leads to an entirely new set of tax consequences. While the decedent might be well beyond the reach of the IRS and state taxing authorities at his death, his heirs are not. The value of any estate that is left to them must be reduced by estate taxes payable.
The 2010 Tax Relief Act has made significant changes to estate and gift taxes through 2012 and offers many new planning opportunities. Here is an overview of the changes.
Estate Tax in 2010
The Tax Relief Act of 2010 has a special provision for 2010 decedents. Executors managing estates of decedents who died in 2010 will have to choose how the estate should be treated for tax purposes:
- The estate is subject to estate tax on the estate value above $5 million (per individual or $10 million per couple), and it receives an increased basis in the assets that pass to the heirs.
OR
- The executor can elect to pay no estate tax on the value of the estate and provide a modified carryover basis to the heirs.
The tax treatment the executor chooses will depend on, among other factors, the total value of the estate, the amount of appreciation built into the assets (excess of market value over purchase price paid by the decedent), and the intended disposition of any inherited assets by the heirs.
Gift Tax in 2010
Gifts made in 2010 are subject to a $1 million exclusion, and a maximum tax rate of 35%.
Gift Tax for 2011 and 2012
For gifts made in 2011, the estate and gift taxes share a combined $5 million (per individual, $10 million per couple) lifetime exclusion and a maximum tax rate of 35%. Any gifts made during a decedent’s lifetime will reduce the amount available to be excluded from the taxable estate.
Estate Tax in 2011 and 2012
Estates of decedents dying after December 31, 2010 will be taxed at a maximum 35% rate on the value of estate assets in excess of a $5 million exclusion (reduced by any gifts made prior to the date of death.)
Generation Skipping Transfer (GST) Tax in 2011 and 2012
Trusts funded or created in 2011 may take advantage of a GST exemption that is equal to the $5 million exclusion amount provided for estate tax purposes.
New Provision for Portability
Under the 2010 Tax Relief Act, any unused exemption that remains after the death of one spouse is available for use as an addition to the exclusions available to the surviving spouse’s estate. Special rules apply to decedents with multiple spouses.
Please contact Colleen Meenk at CMeenk@gccpas.net if you need additional details or have questions about the changes as they apply to your specific situation.
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