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.