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Obama Signs New Federal and Gift Tax Legislation

On behalf of David Whitlock at Whitlock Canter LLC

On December 17, 2010 President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853). One effect of this legislation is to extend the Bush-era income tax cuts through December 31, 2012. There were also sweeping changes made to the federal estate and gift tax laws. The new legislation sets the federal estate tax exemption and generation-skipping tax exemption at $5 million per person with a top tax rate of 35%. The new legislation also allows the executor of an estate for those dying in 2010 to elect no federal estate tax with a modified carry-over basis or apply the $5 million exemption amount with unlimited “step up” in basis.

The new legislation also “unifies” the estate and gift tax exemptions through the end of 2012 at $5 million with a 35% gift tax rate if the gift tax exemption is exceeded during life. This means that the $5 million can be used during life or at death, or any combination thereof. This represents a $4 million increase over the previous gift tax exemption and creates a significant new estate planning opportunity for persons with larger estates. Because the law only extends to the end of 2012, it may pay to take advantage of the available gift tax exemptions before December 31, 2012.

For the first time, the law provides for the “portability” of unused estate tax exemption between spouses. Under the prior law, if a taxpayer passed all of his or her assets to his or her spouse, his or her estate tax exemption was wasted – making the use of “Credit Shelter Trusts” popular. Any unused exemption can now be passed to the surviving spouse at death – which allows the spouse to accumulate up to a $10 million exemption. This provides a useful estate planning tool for many taxpayers, but dictates a close examination of many existing estate plans. Since a federal estate tax return must be filed to achieve portability benefits, many smaller estates which would not otherwise require the filing of a federal estate tax return, now should consider filing a federal estate tax return.

The new legislation does not directly impact the state estate tax rules. The New Jersey estate tax exemption continues to be $675,000 per person. New Jersey’s current position is that a “state only QTIP marital deduction election” may only be filed if no federal estate tax return is filed. Unless this position is modified, taxpayers wanting federal portability of exemption and a “state only QTIP marital deduction election” have a dilemma to solve. Our firm will help you navigate through those treacherous waters.

The New York estate tax exemption continues to be $1 million per person. Neither state provides for “portability” for unused exemption between spouses.

Because of the sweeping recent changes made to federal estate tax law, it is important to have your estate plan reviewed by an experienced estate planning attorney to make certain your estate plan is current and your exposure to estate taxes is kept to a minimum.