Posts Tagged estate taxes

New Estate Tax Rules for 2011 and 2012

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Estate tax rule changes for 2011 and 2012Last October, we wrote about the uncertainty around the estate tax and the potential changes that were coming depending on Congressional action. As you know, following the Tax Relief Act of (very late) 2010, that uncertainty has been laid to rest. In this post, we’d like to summarize the changes enacted by Congress at the end of 2010 and discuss a little about how those changes will affect you.

Regarding Estate Tax Rules, the following is a summary of the enacted changes:

  • The estate and generation-skipping transfer taxes were phased out and fully repealed in 2010.
  • The gift tax rate was reduced to 35%.
  • The gift tax exemption was increased to $1 million for 2010.
  • The estate and generation-skipping transfer taxes for 2011 and 2012 were reduced from the top rates of 55% to 35% and the exemption amount was increased from $1 to $5 million (as indexed after 2011).

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate, gift, and generation-skipping tax rules were set to automatically reinstate in 2011 unless Congress enacted changes before 2011. That would have meant the estate tax rates returning to the rates of 2001, with with the top estate and gift tax rates reverting to 55%!

Some additional technicalities that were included in the Tax Relief Act include, but are not limited to, the following:

  • For gifts made after December 31, 2010, the Act reunifies the gift tax with the estate tax and allows an application exclusion amount of $5 million with a top estate and gift tax rate of 35%.
  • The Act also provides that the generation-skipping transfer tax for descendants dying or gifts made after December 31, 2009 is equal to the applicable exclusion amount for estate tax purposes. Specifically, up to $5 million for 2010.

This means that up to $5 million in generation-skipping transfer tax exemption may be allocated to a trust created or funded during 2010. Although the generation-skipping transfer tax is applicable in 2010, the tax rate for transfers made during 2010 is 0%. The generation-skipping transfer tax rate for transfers made in 2011 and 2012 will be 35%.