While many sunsets are fantastic, there is one on the horizon that could prove costly to your estate.
The sun is setting on legislation enacted in December 2010 that prevented reversion of estate and gift tax law to pre-2001 provisions. That reversion was scheduled to occur January 1, 2011.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) pushed the reversion back to January 1, 2013. At the time of enactment people wishing to avail themselves of the favorable provisions of the 2010 Tax Relief Act had a full two years in which to do so.
Now with only months remaining before the scheduled sunset, the sky is starting to darken. Now is the time to act.
A Recent History of the Relevant Provisions
Immediately prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) a taxpayer was afforded one exemption from gift or estate tax for transfers whether such transfers took place during one’s lifetime or at death. This escalating exemption was $675,000 in 2001 and was scheduled to top out at $1,000,000 in 2006. The maximum tax rate for both gift and estate tax was 55%.
2001 – 2010 Law
Enacted in 2001, EGTRRA over a period of years, and in incremental steps, increased the estate tax exemption from a new beginning level of $1 million in 2002 to $3.5 million in 2009. The gift tax exemption however remained at $1 million. The maximum tax rate for both fell to 45% by 2009. Although written as part of the original 2001 legislation, few expected Congress to allow the estate tax to completely disappear in 2010; but that is exactly what happened.
The original legislation repealed the estate tax completely for decedents dying in 2010 (however the gift tax continued to apply in 2010; but at a reduced tax rate of 35% and with the same $1 million applicable exclusion amount). The provisions of EGTRRA were set to expire December 31, 2010 thus reinstating the law as it stood pre-2001.
The Two Year Opportunity 2011-2012
In December of 2010, to prevent a scheduled return to pre-2001 rules, Congress passed the 2010 Tax Relief Act. The relevant estate and gift tax provisions of this law effective for 2012 are as follows:
- Ability for donors or decedents to transfer $5,120,000 million free of gift or estate tax.
- Ability for donors or decedents to transfer $5,120,000 million free of generation skipping tax (GST)
- A 35% rate for gifts, taxable estates, estate and GST transfers above the exclusion amount
2013 Laws (as of today)
Absent any further legislative change between now and January 1, 2013, the law reverts to pre-2001 provisions.
- $1 million exemption for gift, estate or GST purposes
- A top rate for gift, estate or GST purposes of 55%
While many in the industry have expressed skepticism that Congress would let such a dramatic swing occur back to exemption amounts and rates under law that existed over 12 years ago, the commentators have been wrong before. In 2009, “no one” thought Congress would let the estate tax disappear for 2010. Experience has shown Congress is far from predictable.
What to Do Now
If you want to lock in the most generous estate tax exemptions and rates in recent history, contact your RubinBrown professional or your attorney as soon as practical to discuss taking action in the remaining months of this window.
Even if you are not inclined to do anything at this point, it may be a good idea to review your documents to ensure that their provisions comport with your wishes if we see a return to pre-2001 law.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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