Tuesday, December 21, 2010

PROVISIONS OF THE NEW TAX LAW

I will undertake to summarize the key provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 over several postings. Let’s start with the new transfer tax provisions. Note below that there are some unique opportunities for conducting generation skipping transfers prior to 1/1/2011.

A. Estate and GST taxes reimposed for 2010, with reimposition of prior basis step-up regime.

     1. But with election available to avoid estate tax in 2010 on 2010 deaths, which would use the EGTRRA limited basis step-up provisions.

          a) In that situation, the deadline for filing the Form 8939 relating to basis allocation is delayed until 9 months from date of enactment.

     2. But GST tax rate set to zero. Decedent is still considered to be "transferor" for GST purposes.

          a) This is an incentive to make generation skipping transfers prior to the expiration of 2010, including distributions out of trusts that will be taxable distributions or taxable terminations.

               (1) Outright gifts are subject only to potential gift taxes.

                    (a) Which will deplete the estate for estate tax purposes if the transferor survives an additional three years.

               (2) Or to trusts where beneficiaries are all skip persons.

                    (a) Consider opting out of GST exemption allocation to avoid unnecessarily wasting GST exemption.

               (b) Post-2010 distributions to beneficiaries at the grandchild level (but not to beneficiaries of younger generations) will not be subject to GST tax, per Code §2652(a).

                    (c) If some desired beneficiaries are grandchildren and some are greatgrandchildren, you may want to have separate trusts for the different generation levels.

     3. QDOTs subject to estate tax if noncitizen surviving spouse died in 2010.

B. Increase in exclusion amounts and exemptions to $5 million for 2010-12, with inflation adjustment in 2012.

     1. This is an incentive to make lifetime transfers before 12/31/12 to the extent of available exclusions, since the larger exclusion amounts may revert to much lower amounts in 2013.

          a) But generally want to defer until at least 1/1/11 since gift tax exemption does not increase to $5 million until 2011.

     2. However, gift tax exemption remains at $1 million for 2010 gifts.

C. Maximum estate, gift and GST taxes reduced to 35% through 2012.

     1. This is an incentive to make lifetime transfers before 12/31/12 to the extent of available exclusions, since the rates may revert to much higher levels in 2013 (i.e., 55% maximum rates).

     2. And gift and estate tax rates are reunified.

D. Extended filing deadlines for estates of decedents dying from 1/1/10 to 12/17/10.

     1. 9 months from 12/17/2010 for filing an estate tax return, paying estate tax, making a disclaimer of an interest passing by reason of decedent's death, and filing of GST tax returns and making elections required on a GST tax return).

          a) But watch state law limits on time to make a disclaimer.

E. A surviving spouse can use the unused exclusion amount of his or her LAST deceased spouse for estate tax purposes (but only for spouses dying before 12/31/12).

     1. But it requires an election to be made on the estate tax return of the first spouse to die. This may mean a return is needed even though one would not otherwise be required.

     2. IRS can readjust available unused exclusion amount of first spouse to die, even though statute of limitations for examining that estate tax return has expired.

     3. GST exemption amounts are not portable.

     4. Credit shelter trusts (in lieu of maximizing transfers to surviving spouse or a marital deduction trust) may still be desirable at the death of the first spouse to allow for full use of GST exemption of first spouse, and to protect against estate tax at second death arising from appreciation in the value of assets.

          a) However, credit shelter trusts lose the opportunity for basis step-up at the death of the surviving spouse.

F. Return to 2001 rules and rates will occur on 1/1/13 (unless subsequent changes are made by law).

1. Here we go again!

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