2011-2012:
Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010
On December 17, 2010, President Barack Obama signed the above law into effect, which halted the anticipated 2011 return of a $1M exemption equivalent, making only short term changes to the federal estate and gift tax system . This new law is effective through December 31, 2012. So through 2012, this is what we have:
New Federal Tax Laws for 2010 through 2012
- The federal estate, gift and GST tax exemptions are unified for tax years 2011 and 2012:
- For 2011, the unified exemption is $5 million with a single 35% tax rate on assets exceeding the exemption.
- Beginning in 2012, the $5 million exemption shall be indexed for inflation, and the 35% tax shall continue on assets over the exemption.
Retrofitting 2010 :
- For estates of all decedents who died in 2010, Executors have two options:
The Executor can elect between
(1) the new estate tax exemption of $5 million with a 35% rate on the excess and a full cost basis “step-up” to the date of death value of most assets in the estate; or
(2) an unlimited federal estate tax exemption and “carryover basis.” If a carryover basis is elected, the recipient of most types of property inherited from a decedent will receive a cost basis for future income tax purposes equal to the lesser of the decedent’s adjusted basis or the fair market value of the property at the decedent’s death. Executors who opt for carryover basis can increase the basis of estate assets by up to $1.3 million (plus another $3 million on assets passing to a surviving spouse).
- For estates of decedents who died prior to December 17, 2010, the deadline for filing the estate tax return is extended to 9 months after the date of enactment. The due date for filing the carryover basis report, which under prior law was to be filed with the decedent’s final income tax return, may now be deferred to 9 months after date of enactment.
Portability of Unused Federal Estate Tax Exemption Between Spouses in 2011 and 2012
- Effective for decedents dying after December 31, 2010, the unused portion of a deceased spouse’s federal estate tax exemption may be transferred to the surviving spouse. This is known as "portability." In order to achieve portability, the Executor of the deceased spouse’s estate must properly elect to transfer the unused portion of the exemption on a U.S. Estate Tax Return. This timely filed election allows portability-- the surviving spouse may use his or her own federal exemption plus the unused portion of the predeceased spouse’s exemption at his/her death, but...
- A surviving spouse who remarries will lose the prior deceased spouse’s exemption.
- Portability does not apply to the GST tax exemption.
Note: The use of a proper trust option at the first spouse’s death will protect appreciation from being taxed at the surviving spouse’s death. A proper plan will also preserve the federal GST tax exemption of the first spouse to die.
- Connecticut has not adopted "portability." The Connecticut estate tax exemption has been retroactively reduced from $3.5M to $2M (retroactive to January 1, 2011.)
Gift tax reminder
For 2011, the federal and Connecticut gift tax annual exclusions are $13,000 per recipient. One spouse may give up to $26,000 to each recipient if the other spouse elects to “split gifts” on a gift tax return.
Gifts that exceed the annual exclusion incur no federal gift tax until cumulative excess gifts reach the federal lifetime exemption of $5 million in 2011 and 2012. No Connecticut gift tax is incurred until excess gifts made after 2005 reach the Connecticut exemption of $ 2 million.
For specifics on Connecticut 2011 Public Act 6 that retroactively made changes to Connecticut's gift and other taxes, here's the URL to Connecticut DRS information:
Remember that certain gifts are not taxable. These gifts include tuition payments made directly to qualifying educational institutions and medical payments made directly to healthcare providers.
The new legislation did not adopt any limitations on the use of grantor retained annuity trusts (“GRATs”) or valuation discounts for family limited partnerships and LLCs. Homage is paid to Reid and Reiga for the above analysis