Developments in Tax, Trusts, and Estates Law
The 2010 Tax Relief Act
From the Tax, Trusts, and Estates Department of Karr Tuttle Campbell
|Kirsten L. Ambach
Alan D. Judy
Kenneth E. Rekow
Sarah B. Bowman
| Douglas A. Luetjen
Charles A. Robinson
Johanna M. Coolbaugh
John E. Poffenbarger
| James K. Treadwell
William J. Cruzen
Kathryn M. Porter
George S. Treperinas
Federal Estate Tax
2010 Estate Taxes Under the Economic Growth and Tax Relief Reconciliation Act. Under the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”), which was the governing law before the 2010 Tax Relief Act was passed, the federal estate tax was repealed for all of 2010. Under EGTRRA, the unlimited step-up in basis regime to which many people had become accustomed was replaced with modified carryover basis in 2010. The personal representative of an estate for a decedent dying in 2010 could allocate $1,300,000 of income tax basis step-up among qualified estate assets passing to any beneficiary or beneficiaries. An additional $3,000,000 of income tax basis step-up could be allocated to a surviving spouse. If an estate had any remaining assets, the beneficiaries receiving these assets would receive a carryover income tax basis equal to the basis held by the decedent. Capital gains taxes would likely then be owed on these assets when the beneficiaries sold the assets.
exemption is scheduled to revert to the 2001 level of $1,000,000, with a top federal estate tax rate of 55%.How the 2010 Tax Relief Act Impacts 2010 Estates. Under the 2010 Tax Relief Act, personal representatives of estates of decedents dying in 2010 now have a choice of tax laws. A personal representative may elect to apply the 2010 law as anticipated under EGTRRA and pay no federal estate taxes and take a carryover income tax basis of assets instead of the step-up in basis. Or, personal representatives of 2010 estates may choose to apply the new tax laws as they apply for 2011. For 2010 estates, the default choice is the new tax laws as they apply for 2011, with a $5,000,000 estate tax exemption and a step-up in income tax basis to all qualified estate assets. A careful analysis will be required to determine whether or not a personal representative should opt out of the new law and instead choose carryover basis and no federal estate tax. We recommend personal representatives administering 2010 estates contact counsel to discuss the appropriate tax options.Portability of Federal Estate Tax Exemption
For decedents dying after December 31, 2010, the 2010 Tax Relief Act allows the personal representative of a decedent’s estate to make an election to allow a surviving spouse to take advantage of any unused federal estate tax exemption of the deceased spouse. This new “portability” option means a decedent’s unused federal estate tax exemption need not go to waste even if not fully captured in a traditional “credit” or“bypass” trust. While as with the rest of the 2010 Tax Relief Act changes, there is no guarantee the portability option will extend beyond 2012, this concept appears to be a popular feature of the new law and is likely to be continued. However, the portability option does not apply to the generation skipping transfer tax exemption discussed below, nor does the State of Washington include the portability option in its estate tax system.
Federal Gift Tax
The 2010 Tax Relief Act reunifies the estate and gift tax laws. Accordingly, in 2011 and 2012, each person will have a $5,000,000 lifetime federal gift tax exemption with a top tax rate of 35%. In 2010, the gift tax exemption was $1,000,000. Persons who previously used up all of their lifetime federal gift tax exemption by making gifts equal to or in excess of $1,000,000 prior to January 1, 2011, now have an additional $4,000,000 of federal gift tax exemption with which to work. However, the increased federal gift tax exemption expires on December 31, 2012, with a $1,000,000 federal gift tax exemption scheduled to return in 2013 unless Congress acts before then to extend the 2010 Tax Relief Act. At this time, the law is unclear as to how estates will be impacted for decedents dying after December 31, 2012, if the 2010 Tax Relief Act is not extended and the decedent had used more than $1,000,000 of his or her lifetime federal gift tax exemption in 2011 or 2012. Before proceeding with gifts in excess of $1,000,000 in 2011 or 2012, we recommend careful analysis with counsel of a particular planning situation.
Federal Generation-Skipping Transfer Taxes
Under EGTRRA, the federal estate and generation-skipping transfer (“GST”) taxes were repealed for 2010. The 2010 Tax Relief Act retroactively reinstates the generation-skipping transfer tax exemption to $5,000,000 for 2010, with a zero percent GST tax rate. For 2011 and 2012, the generation-skipping transfer tax exemption is $5,000,000 per person, with a top tax rate of 35%. However, as with the federal estate and gift taxes, these changes are scheduled to expire on December 31, 2012, with a $1,000,000 generation skipping transfer tax exemption scheduled to come back into effect January 1, 2013.
Exemptions to Be Adjusted for Inflation
Under the 2010 Tax Relief Act, the federal estate, gift, and generation-skipping transfer tax exemptions will be indexed for inflation beginning in 2012. However, as stated above, there is no guarantee that the 2010 Tax Relief Act will be extended beyond December 31, 2012.
Washington State Estate Tax
Washington’s estate tax is unaffected by the changes in the federal tax laws. Estates valued at less than $2,000,000 are not subject to Washington State estate tax. For estates in excess of this amount, the state estate tax rate ranges from 10% to 19%. Washington does not have a state gift tax. As noted above, Washington does not allow “portability” of a decedent’s Washington estate tax exemption.
What This Means for You
Given the changes in the tax laws and options now available under the 2010 Tax Relief Act, we recommend that all estate plans be reviewed to ensure that the tax provisions contained in current estate planning documents are still appropriate. Since the federal estate tax exemption will continue to be different than the Washington estate tax exemption, we also recommend estate planning documents be reviewed to ensure planning for both federal and state estate tax exemptions is coordinated, if that has not already been done.
We always recommend that clients review their estate plans with counsel every three to five years or whenever any significant event occurs in order to ensure that documents adequately reflect current law and testamentary intentions. While we encourage all clients to have their estate plans reviewed, we especially encourage clients who have not reviewed their plans in three or more years to do so.
For more information about the 2010 Tax Relief Act and what effect the current law might have on your personal estate plan, please contact any of the Karr Tuttle Campbell Tax, Trusts, and Estates attorneys or your personal Karr Tuttle Campbell attorney, all of whom can be reached at (206) 223-1313 or by visiting the firm’s Web site at www.karrtuttle.com.
IRS Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that to the extent this communication contains advice relating to a federal tax issue, it is not intended or written to be used, and it may not be used for (i) the purpose of avoiding any penalties that may be imposed on you or any other person or entity under the Internal Revenue Code or (ii) promoting or marketing to another party any transaction or matter addressed herein.
Alerts are published by Karr Tuttle Campbell to present information on legal matters which may be deserving of clients’ immediate attention. The information contained in this Alert should not be regarded as legal advice or opinion