Tax Law Blog
June 08, 2010 / As 2011 Approaches, What Changes Can We Expect from the Gifting and Estate Tax Rules
The Economic Growth and Tax Relief Act of 2001 (EGTRRA) provided for a gradual reduction and elimination of the estate tax. Under EGTRRA, the estate tax exemption rose from $675,000 in 2001 to $3.5 million in 2009, and the rate fell from 55% to 45%. In 2010, the estate tax was eliminated. As Congress has failed to enact any permanent solution to the current situation, 2011 will bring harsh tax results if new legislation is not passed by years end. These results include: exemption of $1 million and the tax rate of 55%.
However, several proposals are under consideration for a permanent solution to next year's problem. Of these various estate tax options, the following have gained the most attention. The primary option is an extension of the 2009 rules. This option actually affects deaths in 2010, as a permanent extension of the 2009 rules (a $3.5 million exemption and a 45% tax rate) would retroactively apply to individuals dying in 2010. Other proposals include rules similar to the 2009 rules; however, with certain modifications, such as:
An alternative 35% tax rate and a $5 million exemption;
1. $3.5 million exemption and a 35% rate, with the ability of the surviving spouse to inherit any unused exemption of the decedent inheritance of spousal exemption,
2. Restriction of grantor retained annuity trusts (GRATs), which can be used to virtually eliminate estate tax by providing an annuity with a remainder, and
3. Restricting discounts for estates left to family partnerships and conforming fair market value for purposes of the estate tax.
While the hybrid of estate planning options are numerous, according to most experts, the principal components of any policy are the amount of the exemption and the tax rate. The two most common levels exemption levels being considered are $3.5 million and $5 million; and the two most common rates being considered are 45% and 35%. Another issue is whether to index the exemption for inflation. Over time, as prices rise, a fixed exemption causes more estates to be subject to tax. Without indexing, Congress may return from time to time to reconsider the exemption.
A final issue is the potential carryforward of an unused estate tax exemption to the surviving spouse. Many proposals automatically permit the second spouse to inherit any unused exemption and add it to his own future exemption. Proposals have also been made to increase the percentage or dollar limits of special use valuations and conservation easements. At the same time, there are proposals to restrict practices considered as abuses.
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