New Estate and Gift Tax Laws

At the last minute Congress and the President came to an agreement regarding the estate tax situation. Note that Congress hasn't "permanently" fixed the problem. The new law addresses the years 2010, 2011 and 2012. That being said, at least we know how the estate tax stands for the next two years at least.

2010

Prior to this amendment there was no estate tax for 2010. However the price of this benefit was to provide for carryover of the decedent's basis in the property. But there was a ray of sunshine since you could add up to $1.3 million in step up basis (with one additional $3.0 million if the spouse was the beneficiary). The net result of this law was that for most estates the assets received a full date of death basis adjustment.

Brief Summary of Law

2010

Estate Tax Alternative I

Exclusion amount$5,000,000
Maximum tax rate35%

Estate Tax Alternative II

Exclusion amountUnlimited no dollar limit
Maximum tax rateZero (0%)

Catch for Alternative II

 Basis of deceased party carries over with Limited increase in basis available. $1,300,000 (plus $3,000,000 for property passing to spouse)

Gift Tax

Exclusion amount$1,000,000
Maximum tax rate35%

2011 - 2012

Estate Tax

Exclusion amount$5,000,000
Maximum tax rate35%

Gift Tax

Exclusion amount$5,000,000
Maximum tax rate35%


Detailed Summary

2010

Estate Tax

  • Basic exclusion amount
    		• $5,000,000 (formerly called "applicable exclusion amount")
  • Unified credit
    		• $1,730,800
  • Maximum tax rate
    		• 35%
  • Level where 35% rate begins
    		• $500,000. But no tax due until taxable estate +gifts exceed $5M
  • Step-up in basis
    		• Full step-up, unless estate elects out of estate tax
  • State death tax deduction
    		• Still available on line 3b (as it was in 2005- 2009)
  • Due date
    		• No earlier than nine months after date of enactment
  • Carryover basis
    		• Applicable only if estate elects out of estate tax
  • Maximum basis increase available
    		• $1.3M (plus $3M for property passing to spouse)
  • Due date of new form (8939)
    		• No earlier than nine months after date of enactment

    Penalties:
    1) Failure to report to the IRS: $10,000 per failure
    2) Intentional disregard: 5% of FMV of property
    3) $50 per failure to report to beneficiaries/donees
  • Capital gains rate
    		• Proceeds in excess of adjusted tax basis subject to tax at the applicable capital gains rate when sold (currently 15%)

    Gift Tax

  • Exclusion amount
    		• $1,000,000 (no change)
  • Maximum tax rate
    		• 35% (no change)
  • Due date
    		• April 18, 2011 (Emancipation Day observed on Friday, April 15, 2011)

    2011 - 2012

    Estate Tax - Definitions

  • *DSUEA
    		• "Deceased spousal unused exclusion amount" (new in 2011)
  • Basic exclusion amount
    		• $5,000,000 (2012: indexed for post-2010 inflation)
  • Basic unified credit
    		• $1,730,800 [+35% of increase over $5M due to indexing- 2012 only]
  • Maximum tax rate
    		• 35%
  • Level where 35% rate begins
    		• $5,000,000. But no tax until taxable estate + Gifts exceed $5 M + DSUEA
  • State death tax deduction
    		• Still available on line 3b (as it was in 2005-2009)
  • Portability of exclusion
    		• DSUEA only from estate of spouse who dies in 2011 or 2012
  • Last deceased spouse
    		• DSUEA available only from last deceased spouse. Thus, DSUEA could be lost if surviving spouse remarries, and then is "re-widowed".
  • Applicable exclusion amount
    		• Basic Exclusion Amount + DSUEA
  • Applicable unified credit
    		• Basic Unified Credit + 35% of DSUEA
  • Step-up in basis
    		• If the assets in the first estate are placed in bypass trust these assets get no additional basis step-up at survivor's death, but are protected from tax on any appreciation at second death.

    If the same assets instead given directly to surviving spouse (and protected from tax in second estate by DSUEA) the assets do get step-up.

    But trade-off is that appreciation of these assets between first and second deaths could be taxable if they exceed combined exclusions available to the surviving spouse.

    Gift Tax

  • Exclusion amount
    		• $5,000,000 + DSUEA Same as estate tax "applicable exclusion amount"
  • Unified Credit
    		• $1,730,800 + 35% of DSUEA Same as for estate tax (now "reunified")
  • Maximum tax rate
    		• 35% Same as for estate tax
  • Due Date
    		• April 15 of year following gift
  • Total available exclusion
    		• Same as for estate tax, except that a donor could use the DSUEA's from multiple deceased spouses during the donor's lifetime.


    Carryover Basis and Form 8939

    On December 17, 2010, the IRS posted an official draft US Form 8939, "Allocation of Increase in Basis for Property Acquired From a Decedent". It will be required for all estates for persons who pass away in 2010 with more than $1.3m of non-cash assets valued as of the date of death. This new form implements the allocation of up to $1.3m of basis increase per decedent (plus another $3m for property passing to a spouse).

    You.ll find it on the IRS Draft Tax Forms page:

    http://www.irs.ustreas.gov/app/picklist/list/draftTaxForms.html
    Also attached to this web site is a copy of the preliminary form.

    It appears as the most recently posted form. Click once on the "Posted Date" column on the far right to force it to the top. Or, just enter "8939" into the "Find" box (middle left of the screen, right above the Product Number column), and press or click on the Find button.

    There could be as few as 3,000 of these forms required to be filed for 2010. The only estates that would elect carryover basis treatment would be those over $5,000,000, and some of those (in the $5M - $7M range) might stay with the default estate tax treatment if it is less expensive than eventual capital gains tax on property that is greatly appreciated.

    Deadline for Filing Form 8939

    The Act of 2010 provides an extension for filing this form until nine (9) months after the date of enactment. The due date otherwise would have been Monday, April 18, 2011. Friday, April 15, 2011 is Emancipation Day, which is a holiday in Washington, D.C. This has the effect of extending IRS deadlines until the next business day.



    What should you do if you represent someone who passed away in 2010? First, determine the fair market value of all assets of the deceased party that would be included in an estate tax return if required to be filled. Second, you need to determine which alternative to elect. That is choose to use the $5,000,000 exclusion taxable estate date of death basis rule or the no estate tax carryover basis rule.

    In most situations the best approach is to choose the $5,000,000 exclusion date of death basis rule. However, for larger estates or estates with net operating loss or carryover or other special attributes, the alternative choice may be better. Only a detailed review of the situation and the particular fact pattern can answer this question.

    In any event, a detailed inventory of all of the deceased party's assets, together with a valuation of these assets at date of death, will be required for all persons who passed away in 2010 to determine the better approach to and provide tax basis information for the heirs of the deceased party.





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