Estate Tax, Gift Tax and Generation-Skipping Transfer Tax Provisions of the Tax Relief ... Act of 2010

21 December 2010 Publication

On Dec. 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (the "Act"). The Act includes, among other things, an extension of the Bush-era tax cuts for the next two years. At the conclusion of two years, the Act sunsets and we will be faced with the same uncertainty in 2013 that the Act is meant to address in 2011. The following summarizes the provisions specifically related to estate taxes, gift taxes, and generation-skipping transfer taxes:

1.  Estate Tax Exemption and Estate Tax Rate

a). 2010.  The Act allows estates of decedents dying in 2010 to choose between (1) estate tax (based on a $5 million exemption and 35 percent top rate) and a step-up in basis or (2) no estate tax and modified carryover basis (that is, the basis step-up would be limited to $1.3 million for all beneficiaries and an additional $3 million for the surviving spouse).

b) 2011 and 2012. 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 percent.

2.  Gift Tax Exemption and Gift Estate Tax Rate. For gifts made after Dec. 31, 2010, the Act reunifies the gift tax with the estate tax, with an applicable lifetime gift tax exclusion amount of $5,000,000 and a top gift tax rate of 35 percent.

3.  Generation-Skipping Transfer ("GST") Tax.

a) 2010. The GST tax rate is 0 percent in 2010. Therefore, there is no GST tax on transfers (either outright or from an existing trust) to grandchildren (or more remote descendants) in 2010. If you are contemplating substantial transfers to grandchildren (or more remote descendants), you must act before Dec. 31, 2010, to take advantage of this provision (but such transfers may be subject to gift tax).

However, if a trust was created or funded in 2010, future distributions to grandchildren (or more remote descendants) from such trusts may not remain exempt and may be subject to GST tax. Therefore, up to $5 million in GST tax exemption may be allocated to a trust created or funded during 2010.

b) 2011 and 2012. The GST tax rate for transfers made in 2011 and 2012 will be 35 percent and the GST exemption will be $5 million.

4. Date for Filing Estate Tax Return and Disclaimers. For a decedent dying after Dec. 31, 2009, and before the enactment date, provides that the due date for filing an estate tax return, making any payment of estate tax, and disclaiming an interest in property passing by reason of death is not to be earlier than the date that's nine months after the enactment date; that is, Sept. 17, 2011.

5. Portability. Effective for estates of decedents dying after Dec. 31, 2010, the Act allows the executor of a deceased spouse's estate to transfer any unused exemption to the surviving spouse. In other words, the Act makes the estate tax exemption "portable" between spouses.

6. Uncertainty After Dec. 31, 2012. As mentioned above, on Jan. 1, 2013, the law will revert to 2001 levels - $1 million gift and estate tax exemption - unless Congress otherwise acts before Dec. 31, 2012.

The Act could provide significant alternatives to your current estate plan, and we recommend you review that plan in the near future. If you would like more information or would like to review your estate plan, please contact an attorney in Gardere's Trusts & Estates Practice Group.


This communication has not been prepared as a formal legal opinion within the procedures described in Treasury Department Circular 230.  As a result, we are required by Treasury Regulations to advise you that for any significant Federal tax issue addressed herein, the advice in this communication (including any attachments) was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.

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