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Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010

January 20, 2011

You have probably heard or read that last month President Obama signed the Tax Relief, Unemployment Reauthorization, and Job Creation Act (the “Act”) into law. But in case you have missed some of the details of the Act in the press, the following is a summary of the key provisions relating to estate, gift and generation-skipping transfer taxes.

For the first time in many years, all three transfer tax regimes – estate, gift and generation-skipping – are unified with an exemption equivalent of $5 million. This essentially means that couples with tax-planning wills or trusts can leave a combined total of $10 million to future generations without incurring any transfer taxes. Annual exclusion gifts of $13,000 per year to any individual from any individual continue to be “excluded” gifts and do not erode the $5 million exemption.

For deaths that occurred in 2010, the new Act gives fiduciaries two options. The first option is to use the $5 million unified estate, generation-skipping transfer and gift tax exemption, which provides for the basis of assets to be stepped-up to the fair market value of those assets on the date of death. The second option is to apply the law that otherwise applied in 2010 (i.e., an unlimited exemption from estate and generation-skipping transfer taxes, but with a carry-over basis, instead of a stepped-up basis, for assets in excess of $1.3 million). This change will be very helpful to people administering estates for deaths that occurred in 2010 because it gives the fiduciary an option for avoiding the complicated carry-over basis rules that would otherwise apply (and which created daunting capital gains tax ramifications).

The transfer-tax regime created by this Act will apply only until the end of 2012, and then we will likely face another round of significant changes, or the Act will sunset and we will again be preparing to turn the clock back to 2001. This means, though, that Congress has granted a window of opportunity over the next two years for people to make significant transfers of wealth to their loved ones without incurring transfer taxes. For example, during the next two years a couple who have not previously used any of their transfer tax exemption could transfer $10 million into a trust for the benefit of the couple’s family without incurring transfer taxes.  And if Congress doesn’t subject the transferred property to tax after 2012, the property transferred, and the future appreciation on that property, could continue for many generations without ever incurring transfer taxes.  For people who are willing and able to do so over the next two years, this could be an unprecedented opportunity to transfer wealth free of transfer tax.

Finally, in spite of the relief that the Act provides at the federal level, Washington and Oregon continue to impose their own death taxes on estates in excess of $2 million and $1 million respectively. Planning to minimize those taxes and to address the uncertainty in the federal laws after 2012 should be a priority in estate planning over the next two years.

If we can help with questions you may have about the new Act or about your estate plan, please let me know at HGuthrie@dunncarney.com.

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