Details of the Senate Version of the Tax Bill
Effective date. The law would kick in on Jan. 1, 2011. This means that for a small number of U.S. taxpayers who are very wealthy and very sick, there will be a substantial difference between dying in 2010, when there is no estate tax, and 2011, when there is one. But such life-and-death dilemmas will affect far fewer than if the 2011 individual exemption remained at $1 million.
Duration. The Senate’s bill makes this regime effective only for 2011 and 2012. At that point the provisions “sunset,” and if Congress doesn’t act, the 2013 top rate would again be 55% and the exemption $1 million per individual. So that may mean more estate-tax drama two years from now.
Inflation indexing. The $5 million exemption would be indexed for inflation beginning in 2012, which suggests the drafters foresee an extension.
Election for 2010 estates. The bill gives 2010 estates the choice of whether to use 2010 or 2011 tax rules. One consequence of this year’s tax lapse is that some heirs—often those of the affluent rather than the very wealthy—fare worse under this year’s law.
That’s because of a change in capital-gains tax. Just for this year, the tax on heirs who sell assets of those who died in 2010 is based on the original acquisition cost of the assets, not on their value as of the date of the taxpayer’s death, as is usually the case.
Estate attorney Mike Foltz of Balasa, Dinverno, & Foltz in Itasca, Ill., welcomes the change because he had two clients in this situation. “They had long-held securities and real estate, and it didn’t seem right that the taxes were higher if they died in 2010 than 2009 or 2011,” he says.
Who makes the choice as to which regime to use? The executor. In a few cases the decision will be difficult, Mr. Aucutt says, “but in most, the choice will be obvious.”
Portability of exemption. Each partner of a married couple has always been allowed a full individual estate-tax exemption, but under earlier law married couples often lost the value of one exemption unless they got good legal advice. The loss occurred if the first-to-die spouse left everything to the other without the proper trusts in place.
The Senate bill has a “portable” exemption that allows for easier post-death planning. After the death of the first spouse, any unused portion of the spouse’s $5 million exemption may go to the surviving spouse’s future estate.
For those who are planning carefully before death, “this option raises interesting questions as to whether to put the exemption in a trust or not,” says attorney Linda Hirschson of Greenberg Traurig LLP in New York.
Gift and generation-skipping tax. The Senate bill would, for the first time, “unify” the estate, gift and generation-skipping taxes, with one $5 million per-individual exemption for all three. In recent years the exemptions for the three levies have been out of synch, complicating succession planning for family businesses and other matters. Having one exemption level apply to all is a welcome move, says attorney Carol Harrington of McDermott, Will & Emery.
Under the Senate bill, if a taxpayer made a $3 million taxable gift during life, his estate would then have $2 million with which to shelter other assets from tax. If another taxpayer left $4 million to a generation-skipping trust for grandchildren at death, then $1 million would be available.
Her article also mentions what the Senate version of the bill doesn’t do, including place restrictions on GRATs, provide for portability of GST tax exemption between spouses, and make changes to the annual gift tax exclusion.
Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this to my attention.