For 2011 and 2012, the gift, estate and GST tax exemptions are unified again, with the exemption set at $5 million and the tax rate at 35%. The $5 million exclusion is indexed for inflation beginning in 2012. Remember these changes are effective only for the next two years. On January 1, 2013, if Congress does not act again, the gift, estate and GST exemptions will be $1 million (adjusted for inflation) and the top tax rate will be 55%.
Optional Retroactive Planning for 2010 Decedents
Under this new law, the federal estate tax has been reinstated for 2010, with the $5 exemption and 35% tax rate and full basis adjustment to date of death value. However, executors for those who died in 2010 have the option of electing no estate tax with a modified carryover basis (unlimited step-down for loss assets and a limited step-up of $1.3 million plus $3 million for assets passing to a spouse). Executors have an additional nine months after the enactment date to decide, file an estate tax return, pay taxes and make disclaimers. Planning Tip: Electing the modified basis option would generally be advantageous for 2010 decedents with estates that would not be covered by the $5 million exemption. However, each case should be evaluated and determined individually, considering the amount of estate tax payable now vs. income tax that would be due on the gain when assets are sold in the future; expected sales dates; possible future capital gains and ordinary income tax rates; the ability to increase basis up to fair market value as of the date of death on assets that will be sold in the near future, etc.
Planning Tip: The extended time for filings provides additional planning flexibility given the extent of the change in the estate tax law. However, one concern is that beneficiaries may have already accepted benefits, not realizing that the disclaimer period would be extended. Also, disclaimers made during the extended time period, while following federal law, may not satisfy current state law requirements; state statutes may also need to be modified to accommodate the extended deadline.