The following summaries of the estate and gift tax provisions contained in the proposal announced by President Obama on Dec. 6, 2010 are based on information provided in the White House fact sheet.

The tentative compromise announced by the White House regarding the extension of the Bush tax cuts also increases the 2011 and 2012 estate tax exemption amount from the 2009 level of $3,5000,000 to $5,000,000 and reduces the maximum federal estate tax rate otherwise applicable to such years from 45% in 2009 to 35%. While it is impossible to predict the specific provisions of the legislation that will ultimately be enacted to effectuate this compromise, the following summarizes and provides some observations on the provisions related to estate and gift taxes.

Increase in Estate Tax Exemption Amount; Decrease in Maximum Rate

In the event the Bush tax cuts were allowed to expire, the estate tax exemption amount for decedents dying between Jan. 1, 2011 and Dec. 31, 2012 would be $1,000,000 and the maximum federal estate tax rate would be 55%. Under the terms of the compromise, the estate tax exemption amount for decedents dying between Jan. 1, 2011 and Dec. 31, 2012 will be increased to $5,000,000 and the maximum federal estate tax rate will be reduced to 35%. The White House fact sheet does not indicate that the $5,000,000 exemption amount is indexed for inflation.

Additionally, the compromise does not address whether beneficiaries who acquire assets from decedents dying in 2011 and 2012 will be entitled to a step-up to fair market value in the basis of such assets, as was the case prior to 2010, or whether such assets would continue to have a carry-over basis, as is the case for assets acquired from decedents dying in 2010.

Decrease in Maximum Federal Gift Tax Rate

Currently, for gifts made in 2010, the maximum gift tax rate is 35%. Historically, however, with the exception of gifts made during the 2010 tax year, federal gift tax rates are determined by reference to the federal estate tax rates. Therefore, if the Bush tax cuts were allowed to expire, the maximum federal gift tax rate would be equal to the 55% maximum federal estate tax rate.

The White House fact sheet does not discuss the compromise's impact on federal gift tax rates. However, in light of the fact that the compromise provides the maximum federal estate tax rate would be limited to 35%, the logical result would be that the maximum federal gift tax rate will also be limited to 35% for 2011 and 2012.

Increase in Generation-Skipping Transfer Tax Exemption Amount

Each individual is entitled to a generation-skipping transfer (GST) exemption amount which may be allocated to GST transfers made during the year. Historically, an individual's GST exemption amount was equal to the estate tax exemption amount applicable for that year. Since under the terms of the compromise the estate tax exemption amount for 2011 and 2012 is $5,000,000, it again would be logical that the GST exemption amount for those years would also be $5,000,000. As with federal gift taxes, however, the White House fact sheet does not discuss its impact on GST issues.

Items Not Included in Compromise

While recently introduced legislation would have required a minimum 10-year term for all grantor-retained annuity trusts (GRATs), no such requirement was mentioned in the White House fact sheet. This is a provision to watch for as the legislation is drafted and moves forward. Assuming it is not in the compromise legislation, it is still possible that in the near future Congress could require a minimum term length for GRATs. Consequently, if it is not included in the compromise legislation, a taxpayer interested in establishing a GRAT with a short duration may consider acting sooner rather than later to ensure the availability of such a trust.

Similarly, while recently proposed legislation would reduce and/or eliminate the use of discounts in valuing equity interests in closely-held entities, the compromise does not appear to contain any such restrictions. Silence in the White House fact sheet, however, does not mean such a provision will not be in the legislation as passed and, once again, it is possible that such restrictions could be imposed by Congress in the near feature. A taxpayer considering selling, gifting or otherwise transferring an equity interest in a closely-held entity should consider consummating such a transfer as soon as possible prior to any potential Congressional action to limit the use of validation discounts.

A summary of the income tax provisions based on the White House fact sheet are available at this link.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.