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Newsletters 2010 Newsletters 2011 Estate Tax Compromise
Newsletters 2010 Newsletters 2011 Estate Tax Compromise
Tuesday, 14 December 2010 08:54
While we offer a strong caveat that the proposed bill has yet to pass through Congress, the recently announced bargain between leading Republicans and President Obama to extend the Bush tax structure is music to the market’s ears. The extension is likely for two years and will incorporate today’s rate on income taxes, capital gains taxes and the advantaged rate on dividends. However, since there was virtually no possibility that the present year 0% estate tax would also be extended, we have anxiously awaited how Washington might ultimately resolve the future for this important tax. While the impact of the estate tax compromise presently on the table is significant for our clients, it is still premature to make any changes to your estate plan. The major provisions of the proposed estate tax rules are as follows:
- A relatively low 35% top tax rate on estates and a generous $5MM exemption per individual is proposed. For comparison, the top rate stood at 55% and the exemption at $675,000 in 2001. By 2009, because of law passed under President George W. Bush, the top rate had been reduced to 45% and the individual exemption raised to $3.5MM.
- The new rates would go into effect on January 1, 2011.
- Unfortunately, the new provisions are not permanent, but rather only effective for two years through 2012 when they again “sunset” back to a 55% top rate and $1MM exemption should Congress not act to extend them or make them permanent at that time.
- The Senate is proposing that the $5MM exemption be a unified exemption for estate, gift and generation-skipping taxes.
- Any unused portion of the $5MM exemption by the first deceased spouse is considered “portable” and automatically carries over to increase the exemption for the surviving spouse. For instance, if the first-to-die spouse used only $3MM of his $5MM exemption, the exemption for the surviving spouse would be lifted to a total of $7MM.
- Signaling that the plan’s authors anticipate an extension of these proposed provisions after the two-year period, the $5MM exemption would be indexed for inflation beginning in 2012.
- Families settling estates in 2010 will have the option to select the new 2011 provisions. Because estates settled in 2010 do not benefit from the step up in cost basis, there are circumstances where it is advantageous to pay the 35% top rate as opposed to paying high capital gains taxes.
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