Estate Tax Basics

The 2010 Tax Relief Act, signed into law on December 17, 2010, allows a decedent dying after December 31, 2009, to give up to $5 million of assets free of estate tax due to the new applicable exclusion amount of $5 million.  After the exclusion amount, the maximum estate tax rate is 35 percent.  This new estate tax law is temporary and is scheduled to sunset on December 31, 2012.  Under the 2010 Tax Relief Act, property will again receive a basis adjustment equal to the property’s fair market value on the date of the decedent’s death (or on an alternate valuation date).

The 2010 Tax Relief Act gives estates of decedents dying after December 31, 2009 and before January 1, 2011, the option to elect to apply (1) the estate tax based on the new 35 percent top rate and $5 million exemption, with stepped-up basis or (2) no estate tax and the modified carryover basis rules under the prior law (first $1.3 million can be stepped up).

The 2010 Tax Relief Act provides for “portability” between spouses of the maximum exclusion.   Portability allows a surviving spouse to elect to take advantage of the unused portion of the estate tax exclusion of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount. A deceased spousal exclusion amount would be available to the surviving spouse only if an election is made on a timely filed estate tax return. Portability would be available after December 31, 2010.    The Generation Skipping Transfer (GST) Tax is still not portable however.

For gifts made in 2010, the 2010 Tax Relief Act provides that gift tax is computed using a rate schedule having a top tax rate of 35 percent and a maximum applicable exclusion amount of $1 million. For gifts made after 2010, the gift tax is reunified with the estate tax with a top gift tax rate of 35 percent and a maximum applicable exclusion amount of $5 million.  In addition, donors can use their annual gift tax exclusion, which is $13,000 per donee, or $26,000 if the donors are married.

The 2010 Act provides a $5 million exemption for generation skipping transfers for 2010 (equal to the exclusion for estate tax purposes) with a GST tax rate of zero percent for 2010. For transfers made after 2010, the GST tax rate would be equal to the highest estate and gift tax rate in effect for the year (35 percent for 2011 and 2012).