Friday, December 17, 2010

On to Obama for Signing--House Passes the Tax Bill!

HOUSE PASSES "THE TAX RELIEF, UNEMPLOYMENT INSURANCE REAUTHORIZATION, AND JOB CREATION ACT OF 2010": WE ARE ON THE PRECIPICE OF AN UNPRECEDENTED ESTATE AND GIFT TAX REGIME

Late Thursday night House Democrats joined Republicans in staving off an attempt from Liberal Democrats to amend the bill passed by the senate yesterday and usher in an unprecedented estate and gift tax regime. The bill is now on its way to President Obama for his signature.

These changes are certain to have a profound effect on existing estate plans and clients currently considering putting plans in place. With a reduced estate and gift tax rate about to become law, coupled with all time high exemption amounts, the next two years stand to provide huge opportunities in terms of incorporating tax efficient wealth transfer planning strategies. Based on the new laws, as described below, clients may be staring at a limited window of opportunity to drastically reduce estate and gift tax exposure in very simple ways.

The following is a summary of some of the estate and gift tax provisions in the bill and the tax year to which they relate:

2010

1. Estates will be able to elect to be taxed at a 35% rate with a $5 million estate tax exclusion with a step-up in basis and $1 million gift tax exclusion.

2. Estates also have the option to forgo estate tax treatment and elect carryover basis.

3. Estate tax returns will be due no earlier than nine months from the date of enactment.

2011 and 2012

1. The estate and gift tax exclusion amount will be unified at $5 million and the maximum rate for both will be 35%.

2. Portability of the exclusion for individuals dying during 2011 and 2012 will be available to surviving spouses. The exclusion is only available from the last deceased spouse. (Might this create a new market for marriage?)

3. Step-up in basis returns, but assets placed in a by-pass trust will not receive an extra step-up in basis at the surviving spouse's death (but appreciation will be take place outside of the estate).

The increased exclusion amounts for lifetime gifts, along with the potential application of valuation discounts where appropriate, will give clients the ability to transfer significant amount of value out of their estates by simply gifting assets to loved ones. Where some clients may currently have sophisticated and complex planning in place, as deemed helpful under previous tax regimes, these new laws may provide significant opportunities to build on such prior planning.

As we head into a new year with a new set of estate and gift tax laws, now is an ideal time for us to sit down with our clients to reevaluate their current estate plans and see what possibilities exist to further reduce estate and gift tax exposure. Let's all make the most of the next two years!

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