Virginia Stanton Smith is a partner at Grinnell Smith LLP, with offices located in Williamstown and Pittsfield. She brings to the practice many years of experience and particular expertise in estate planning and estate administration. For questions, please contact her at 413-443-1700 or email@example.com.
No one predicted that we would end up where we have arrived with respect to the federal estate tax. If a loved one dies in 2010, there is no tax. If they pass away in 2011 and 2012 and the estate is valued at less than $5 million, there is also no tax. After that, though, it could change radically. Unless there’s another change to the law, estates of more than $1 million will pay a federal estate tax, at a rate as high as 55%.
Overview of the new law. The 2010 Tax Relief Act provides temporary relief. Among other changes, it reduces federal estate, gift and generation-skipping transfer (GST) taxes for 2011 and 2012. There is a $5 million exemption, a top tax rate of 35%, and a step-up in basis. In addition, now a deceased spouse’s unused exemption may be shifted to the surviving spouse. However, these generous rules are temporary – much harsher rules are slated to return after 2012.
Lower rate and higher exemption for 2011 and 2012. For estates of individuals dying in 2009, the top estate tax rate was 45% and there was a $3.5 million exemption. The top rate was to rise to 55% for estates of individuals dying after 2010, and the exemption was to be $1 million. For 2011 and 2012, the 2010 Tax Relief Act reduces the top rate to 35%. It also increases the exemption to $5 million for 2011 and 2012. After 2012, unless the law changes before then, the top rate will be 55%, and the exemption will be $1 million.
Gift tax changes. Years ago, the gift tax and the estate tax were unified; they shared a single exemption and were subject to the same rates. This was not the case in recent years. However, starting in 2011 the gift tax and estate tax are reunified and an overall $5 million exemption applies.
GST tax changes. The GST tax is an additional tax on gifts and bequests to grandchildren when their parents are still alive. The 2010 Tax Relief Act lowers GST taxes for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million (as indexed after 2011) and reducing the rate from 55% to 35%.