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Saturday, December 04, 2010


On Thursday of this week, Senate Finance Committee Chair Baucus introduced an amendment to the Middle Class Tax Cut Act of 2010. It is more likely than not that this amendment will not be currently passed into law, but nobody knows for sure. Indeed, whether the Middle Class tax Cut Act will find its way into law is unknown. While the proposed changes provide substantial estate, gift and generation-skipping tax relief, some of the effective dates provide new risks for any year-end 2010 planning.

Since the proposals are not law, we will not go into great depth in reviewing them at this point. Some of the highlights are:

a. The 2009 estate, gift and GST exemption amount of $3.5 million will be made permanent and indexed for inflation starting in 2011. The maximum rates will be 45%. This change will be retroactive to 1/1/2010, with the reinstatement of normal basis-step up rules – however, taxpayers with transfers in 2010 can elect to apply the 2010 repeal rules instead (with their limited basis adjustments) .

b. The gift tax unified credit will be re-unified with the estate tax exemption, as of 12/2/2010.

c. Provisions will be enacted that resolve many of the 2010 tax uncertainties, including allowing direct skips in trust to take advantage of the move-down rule even if there was no GST tax imposed on the funding in 2010.

d. Unused unified credit of one spouse can be used by the surviving spouse, if an election is made.

e. GRATs will have to have a minimum 10 year period and some value in the remainder interest to obtain favorable GRAT treatment.

A MAJOR aspect of these new rules is that if these amendments are enacted into law, any gifts made after December 2, 2010 will NOT be able to use the 35% gift tax rate and the exemption from GST tax that has been available since January 1, 2010. However, it appears such gifts and transfers will obtain the benefits of the increased unified credit and lower maximum tax rate that are coming in at the same time.

Planning in 2010, especially late this year, has been challenging, to say the least. A large part of this has to do with uncertainties regarding transfers to generation skipping tax trusts and how those trusts will be treated in future tax years. Now, to add uncertainty to uncertainty, any transfers made now through the end of December (or the enactment into law of these provisions if that comes sooner) will face the uncertainty of whether they will be under the 35% maximum gift tax rate and whether they will be exempt from GST tax. Fun, fun, fun!

One word of caution – the above is based on summaries of the proposed changes that I have seen and not a review of the actual legislation. Planners should conduct their own review to determine how exactly the proposals would apply to their situation. 

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