Unsettled Issues Surrounding Estate Tax Revisions

At the end of last year, lawmakers approved tax revisions that set the maximum tax rate at 35% and establish a $5 million exemption for 2011 to extend through 2012. The revisions allow executors of estates of individuals who died in 2010 to choose between paying no estate tax and forfeiting the step-up basis or taking the $5 million exemption and 35% rate under the new law.

The revisions also unify the generation-skipping tax, estate tax, and gift tax regimes, giving all three regimes the $5 million exemption and 35% rate. The new law is set to revert to a $1 million exemption and 55% tax rate for all three regimes in 2013 absent action from Congress.

Additionally, the revisions include a feature that allows for a deceased spouse’s unused exemption amount to pass to his or her surviving spouse. The feature only applies to spouses who die before 2013 and after 2010 and does not apply to the generation-skipping tax.

There are many uncertainties surrounding the tax revisions, however. For example, the IRS has yet to release Form 8939 which gives executors the choice between which tax regime to use for estates of those who died in 2010. Additionally, the IRS has yet to publish Publication 4895 which is meant to provide guidance in the regime election process.

Adding to the confusion is the fact that the carryover basis for executors of estates of those who died in 2010 who elect to pay no estate tax may increase by $1.3 million (not to exceed the fair market value of the assets). The modified carryover basis regime becomes more perplexing when multiple assets and heirs exist.

According to attorney David Leibell, “There’s a lot of information to take in, and what’s scary is it’s only relevant for the next two years.”

See Jerry Gleeson, Estate Tax Revisions Leave Some Issues Unsettled Until 2013, Registered Rep, May 18, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.