2011 Lane Reports

The Estate Tax Is Back

The Lane Report, January 2011
Monday, January 3, 2011 6:00 am
by Timothy P. Fitzgerald

This past December, as the weather outside became increasingly colder, the debate in Washington over taxes and spending was heating up to a fever pitch. Politicians, pundits, and concerned citizens from the right to the left and everywhere in between expressed opinions about our nation's economic policy and tax structure.  One thing remained clear during this time of great uncertainty: Without any action by our elected officials in Washington, by year's end two major pieces of tax legislation signed by former President George W. Bush would expire -- potentially causing income and estate taxes to rise significantly for many Americans. 

Just when it appeared that partisan gridlock in Washington would prevent a compromise, President Obama struck a deal with Congress to provide important tax relief to U.S. taxpayers, and on December 17, the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (the “Act”) was signed into law. 

Whether or not the Act will improve the struggling economy remains to be seen; however, one thing is clear – the Act provides significant estate and gift tax relief and opens up opportunities for comprehensive planning for Americans with substantial accumulated wealth.  As we head into 2011, now is the time to review estate plans to make sure provisions of the Act are implemented.  This is a great time to put in place advanced tax planning strategies in order to minimize overall taxes paid to the Federal government. 

Below is a brief summary of a few important provisions in the Act that will affect estate and gift tax planning in the New Year.


Reduced Estate Tax Rates and Increased Annual Exclusion

As many readers know, the Bush tax cuts gradually reduced the estate tax rate from 2002 to 2009 and eliminated the estate tax entirely for decedents who passed away during 2010.  Without any action in Washington this past December, on New Year's Day 2011 the estate tax would have reverted back to the 2001 levels with a top rate of 55% and only a $1 million exclusion amount.  It has been estimated that this reversion would have impacted over 40,000 estates in 2011. 

With the passage of the Act, the estate tax rate has now been reduced for tax years 2011 and 2012.  For tax years 2011 and 2012, the top estate tax rate will be 35% and the exemption amount will be $5 million in 2011, indexed for inflation in 2012.  It has been estimated that increasing the exemption amount will spare roughly 35,000 estates from federal estate taxation while only decreasing tax revenues to the U.S. government by roughly $20 billion.

With the reduction in the tax rate and increase of the exclusion amount, current estate plans should be re-evaluated to ensure compatibility with the new rate structure, exclusions, and exemptions.  Doing so will help to eliminate unwarranted tax consequences down the road.


Choice of 2010 or 2011 Rules

In addition to changing the tax rate and exclusion amount, the Act also provides some additional flexibility for heirs of decedents who passed away during calendar year 2010.  If a decedent passed away in 2010, the heir will now have the option of applying either the 2010 or 2011 estate tax rules. 

Although at first glance it may seem obvious that heirs would choose to apply the 2010 rules (as there was no estate tax in 2010), choosing that route may subject heirs to higher capital gains taxes when assets are ultimately sold.  That is because under the 2010 rules, heirs inherit assets with a tax basis equal to the original purchase price, whereas under the 2011 rules assets are inherited with a “stepped up” basis to the current market value.  Because the “tax basis” is subtracted from the selling price at the time the asset is sold to determine the gain or loss on sale, tax basis is an extremely important factor to take consideration.   

The choice of applying 2010 or 2011 rules must be fully analyzed to ensure optimal tax savings.  The determination will require taxpayers to perform a thorough analysis of potential capital gains that might realized in the future upon the sale of capital assets.  To do so, taxpayers should consider how long assets will be held, review the original cost basis of assets, evaluate expected future fair market values of such assets at the time of an expected sale down the road, and plan ahead accordingly.


Gift Giving Strategies

The Act also introduces a new “portability” feature that affects how annual exclusion amounts are utilized between married couples.  This will undoubtedly have a significant impact estate and gift planning strategies moving forward.  Essentially, this new feature affords surviving spouses the ability to use a deceased spouse's unused exclusion amount when assessing the tax impacts of transfers made during life or death.  The result of this is that complicated gifting or estate planning strategies that were put in place prior to the Act's passage might be unduly burdensome and may need to be revisited to ensure tax savings strategies are working as intended.

The Act also provides for a two-year retroactive extension of the Individual Retirement Account (“IRA”) charitable rollover provision which allows taxpayers who are age 70½ or older to make tax-free distributions to charity from their IRAs up to $100,000.  Rollovers occurring in January 2011 can be treated as if they were made on December 31, 2010.  Therefore, taxpayers can apply such rollovers to satisfy all or part of the required minimum distributions from IRA accounts in 2010 and any distributions made in January 2011 will count against the 2010 $100,000 exclusion, affording taxpayers with the ability to make another such distribution later in 2011.



The Act contains many other provisions that will impact individuals and businesses over the next few years.  The estate tax provisions contained therein are certainly of extreme importance.  As a result, passage of the Act should prompt taxpayers to reassess their estate plans, including evaluation of all wills and trusts previously set up - to account for changes in rates, exemptions, and to take advantage of other important tax savings opportunities contained in the Act. 

We are very happy to discuss the full impact of the recent legislation and assess the overall planning opportunities available to you at your convenience.  Please call Marc Lane at (312) 372-1040 or (800) 372-1040, or e-mail him at mlane@marcjlane.com to explore all the possibilities.

Timothy P. Fitzgerald is a Principal with The Law Offices of Marc J. Lane, a Professional Corporation. Mr. Fitzgerald is a graduate of DePaul University College of Law (J.D. with Tax Certificate) and Marquette University (B.S.). Mr. Fitzgerald is also a Certified Public Accountant.

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