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As published in the February 2011 edition of The Will & The Way, a publication of the Estate Planning and Fiduciary Law Section of the North Carolina Bar Association

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Act).   The Act provides significant changes related to individual income tax and estate and gift tax, including certain provisions related to the alternative minimum tax (AMT) and generation-skipping transfer taxes. The implications for estate planners, especially for 2011 and 2012 under the Act are both significant and unsettling. Outlined below are a few of the main points.


Estate, Gift and Generational Skipping Transfer Tax.

Under the prior law, for decedents dying in 2010, there was no estate tax applicable; however, the tax basis of the assets to the heirs was subject to modified carryover basis rules. Additionally, on January 1, 2011 the sunset provisions provided that estates in excess of $1,000,000 would be subject to estate tax. The Act raises the estate tax exemption threshold to $5 million and sets the effective top rate at 35% for estates, gifts and generational skipping tax. Under the Act, for estates where the decedent died in 2010, the executor may elect to choose either (i) the modified carryover basis for 2010 or (ii) the $5 million exemption tax formula.   The exemption amount is indexed for inflation beginning in 2012.

The Act also provides for portability between spouses for any unused portion of the estate tax exclusion amount from the estate of the first spouse to die.   This significant provision provides unique planning opportunities as any unused exemption for the predeceased spouse is available to the surviving spouse if timely elections are made.

The gift tax has now been reunified with the estate tax. Individuals can now gift during 2011 and 2012 up to $5 million during their lifetime without incurring gift tax. Annual gift tax exclusions for 2011 remain at $13,000.

The estate, gift and generational skipping transfer tax provisions are effective through 2012. Hopefully Congress will extend these provisions and make them permanent, but as we have learned over the past few years, that is not certain.

Income Taxes – two-year extension of all current tax rates through 2012

Under prior law, the individual income tax rates had been scheduled to revert from their current levels to the levels prior to the Bush tax cuts. Under the Act, the income tax rates remain at 10, 25, 28, 33, and 35 percent. The Act also extends for two years the 15 percent rate for capital gains & dividends (zero percent for those in the 10 and 15% income tax brackets).

Under the legislation, there is a 2-year continued repeal of Personal Exemption Phase-out (PEP) & itemized deduction limitation (Pease). Various credits such as the child tax, earned income, adoption and dependent care credits are also extended. The “so-called” marriage penalty relief has been extended under the Act.

AMT Patch for 2010 and 2011

The 2009 Alternative Minimum Tax provisions that removed an estimated 21 million households from being subject to AMT were continued under the Act. The Act increases the exemption amounts for 2010 to $47,450 ($72,450 married filing jointly) and for 2011 to $48,450 ($74,450 married filing jointly).  It also allows nonrefundable personal credits against the AMT.

Small Business Provisions;  Temporary Employee Payroll Tax Cut    

The Act provides a reduction in the employee’s share of payroll taxes. The employee share of the OASDI portion of Social Security taxes has been reduced 2% on wages and self-employment income earned up to $106,800.

Businesses may also take advantage of some business incentives. Among other things, bonus depreciation has been raised from 50% to 100% for qualified investments made after September 8, 2010 to January 1, 2012.

Continuation of “tax extenders” for 2010 and 2011, including:

  • Several tax extenders were implemented through 2011 including the following:
  • Tax-free distributions of up to $100,000 from IRA plans for qualified charitable purposes
  • Above-the-line deduction for qualified tuition and related expenses
  • Expanded Coverdell Accounts and definition of education expenses
  • American Opportunity Tax Credit for tuition expenses of up to $2,500
  • Deduction of state and local general sales taxes
  • 30-percent credit for energy-efficiency improvements to the home
  • Exclusion of qualified small business capital gains


The biggest impact from the Act will be how each person plans for the  $5,000,000 exemption for lifetime gifting, generation skipping transfers (“GST”), and estate tax and how clients effectively utilize the two-year portability between spouses and the lower estate, gift and GST tax rates for 2011 and 2012.


The maximum Federal gift tax rate for 2011 and 2012 is 35%. The gift tax exemption increased to $5 million for 2011 and 2012. The gift tax rate is scheduled to return in 2013 to the 55% level that existed before  EGTRRA, it is uncertain, as a political matter, whether that will occur. Also, the GST exemption for 2011 and 2012 is $5 million.   The gift and estate tax exemption amount will be adjusted upward with inflation in 2012. Many clients may elect to make split gifts up to $10 million for married couples, eliminate installment notes owned to them, create a new Grantor Retained Annuity Trust (“GRAT”) or Qualified Personal Residence Trust (“QPRT”) and otherwise make use of the exemption amount that is in existence for the next two years.

As the law is presently written, the lifetime gifting exemption and the estate exemption amount returns to $1,000,000 on January 1, 2013. We have all learned over the past few years that the legislative process is unpredictable. It seems logical that after the November 2012 elections we would have more permanent estate legislation but there is no guarantee.   Clients should be made aware before making large gifts that we are uncertain of whether Congress might act to actually impose a retroactive gift tax to the extent that the gift tax credit is used in 2011 and 2012 exceeds the estate tax applicable exemption amount that otherwise apply in the taxpayer’s death if the exemption amount decreases in 2013. It certainly seems that such tax imposition would raise constitutional issues and go beyond what most taxpayers and politicians deem fair. Allowing wealthy taxpayers the opportunity to transfer up to $5,000,000 while living to the next generation and even more remote generations free of gift tax is a significant change in wealth taxation and even though this provision is not permanent it may be very valuable to high wealth clients.


The Act provides that any unused portion of the first dying spouse’s estate tax applicable exclusion amount passes for use to the surviving spouse. For portability the dying spouse must be a US resident or citizen. The amount available is only allowed for the most recently dying spouse so if a persona is widowed and remarries, they lose the portability from the prior spouse. The surviving spouse only has portability rights if they file an estate tax return for the dying spouse and affirmatively elect that portability applies. This means that may taxpayers whose estate would not normally require an estate tax return, will have to file to elect the portability. The amount made available for portability may be used by the surviving spouse for lifetime gifts or transfers at death. The article in this edition of The Will and the Way specifically related to portability provides more details regarding planning with portability.
GST Exemption

The GST tax is generally imposed when wealth is passed from a grandparent to or for more remote descendants.   The GST exemption amount for 2011 is $5,000,000 and will be adjusted for inflation beginning in 2012. The article in this edition of The Will and the Way provides more specific planning opportunities under the Act related to GST.

Estates for People Who Died in 2010

The new law permits for estates of decedentse who died in 2010 to elect to either (1) pay estate tax on assets in excess of the $5,000,000 applicable exclusion amount and receive a full tax step-up on the decedent’s assets under the pre-2010 rules; or (2) pay no estate tax but receive the limited step-up in basis allowed up to $1,3000,000 in total income tax basis passing to any beneficiary and $3,000,000 increase in tax basis for assets that pass to a spouse or to a marital deduction trust.

Therefore, for decedents who died in 2010 and had a taxable estate under $5,000,000, there is no estate tax due and assets owned by the decedent will have an income tax basis equal to the date of death fair market value.    For those estates over $5,000,000 a calculation must be made to determine whether it is more beneficial for the estate to pay estate tax for assets in excess of the exemption amount or to make an election to have the carry over basis rules apply. Once an election is made to use the carry over basis rules, it can only be revoked with the consent of the IRS.

For decedents dying in 2010, the estate tax return must be filed by the later of (1) 9 months after the date of death; or (2) 9 months after the December 17, 2010 enactment, which is Saturday, September 17, 2011. The Monday thereafter is September 19, 2011. Qualified disclaimers with respect to property received by reason of the death of a decedent in 2010 also must be also filed by the later of (1) 9 months after the date of death; or (2) 9 months after the December 17, 2010 enactment, which is Saturday, September 17, 2011. The Monday thereafter is September 19, 2011.


For many high wealth clients with assets in excess of the exemption amount, their estate plans may not change dramatically and formula clauses may still be the best planning. High wealth clients may also further reduce their estates with the increased life time gifting opportunities available for the next two years. For taxpayers significantly under the current exemption amount thought must be given whether to provide for a simplified plan that anticipates no estate tax. Consideration must still be given to whether or not the exemption amount will reduce in 2013 back to $1,000,000 since the Act does not provide for a permanent exemption amount. It may be that disclaimer planning documents are best for those clients with assets under the exemption amount where it is anticipated assets will not exceed the current exemption amount but the client and advisor are concerned the exemption amount may return to $1,000,000 in 2013. Also while the portability provisions may make excellent post-mortem planning, because these provisions are not permanent proper planning may still be needed to maximize the use of both spouses’ exemption amounts. There are many planning opportunities created by the Act and challenges for advisors as we consult with our clients on how best to plan under our new estate law.

Sandra Martin Clark is a partner with Manning, Fulton & Skinner, P.A. in Raleigh, North Carolina. Linda F. Johnson is a principal with Senter, Stephenson & Johnson in Fuquay-Varina, North Carolina.

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