Federal Estate, Gift, and GST Tax Update

On Dec. 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Act”).

The 2010 Act extends the sunset provisions of certain of the “Bush tax cuts” for two years, through 2012. In addition, the 2010 Act makes significant changes to the federal estate, gift, and generation-skipping transfer (“GST”) taxes for calendar years 2011 and 2012 and makes some changes to the federal estate tax for estates of decedents who died in 2010.

This advisory addresses the significant provisions of the 2010 Act.

Federal estate tax

During 2011 and 2012, the federal estate tax rate will be 35 percent and the federal estate tax exemption amount will be $5 million per decedent. Starting in 2012, the exemption amount will be indexed for inflation.

Federal gift tax

During 2011 and 2012, the federal gift tax rate will be 35 percent. The gift tax exemption amount will be $5 million per donor for gifts made during 2011 and 2012.

GST tax

During 2011 and 2012, the federal GST tax rate will be 35 percent. The federal GST exemption amount will be $5 million per transferor.

Portable estate tax exemption

For calendar years 2011 and 2012, estates may elect to allow a decedent’s surviving spouse to use the first spouse’s unused federal estate tax exemption amount. Thus, a surviving spouse would have his or her own exemption plus the deceased spouse’s previously unused exemption amount.

Federal estate tax treatment of 2010 estates

For decedents dying in 2010, the estate will have the option to either (i) pay federal estate tax at a rate of 35 percent with an estate tax exemption of $5 million and receive a stepped up income tax basis on estate assets, or (ii) pay no federal estate tax, but accept, for income tax purposes, the carryover basis rules which have been in effect in 2010.

Summary of rates and exemptions

The following table shows the federal estate, gift, and GST tax rates and exemption amounts under the 2010 Act and certain estate tax information for Washington and Oregon:

The 2010 Act creates significant lifetime gifting opportunities during 2011 and 2012. An individual may, during 2011 and 2012, transfer assets with a fair market value of up to $5 million free of federal gift tax during his or her lifetime. This is in addition to making annual exclusion gifts ($13,000 per recipient) and special gifts for medical and educational purposes. In addition, the exemption portability provision may also add planning opportunities for married couples.

It is important to note that the 2010 Act applies only to calendar years 2011 and 2012. After 2012 and absent further legislative action, federal estate, gift, and GST tax rates and exemption amounts are scheduled to return to 2001 levels. In addition, the portability provision of the 2010 Act will not be effective beyond 2012 without further legislative action.

State estate tax issues

The relationship between federal and state estate taxes is important to consider. For Washington residents (or nonresidents owning assets located in Washington), the Washington estate tax has not changed, with a maximum rate of 19 percent and a $2 million exemption. The State of Washington has no gift tax. For Oregon residents (or nonresidents owning assets located in Oregon), the Oregon inheritance tax has not changed, with a maximum rate of 16 percent and a $1 million exemption. Oregon also has no gift tax.

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Clients should consider the 2010 Act and its impact on their own estate planning structure. Please contact your Davis Wright Tremaine estate planner to discuss these matters.