Douglas A. Turner, P.C.

The year is almost over and a new tax year is almost upon us. Below are some highlights of the temporary estate and gift tax rules for the remainder of 2011 and 2012. The key word is “temporary”. Absent action by Congress, these provisions will expire on January 1, 2013.

The estate and gift tax exemption is once again unified. An individual can give away 5 million dollars during life or at death without paying any federal estate or gift tax. For those with large estates, gifting large amounts in 2012 may be advantageous especially if the exemption decreases to 1 million dollars in 2013. Combined with discounting techniques, the amount of family wealth that can be transferred without estate or gift tax implications is substantial.

Along with the estate and gift tax exemption, the GST exemption is also 5 million dollars (indexed to inflation). GST stands for generation skipping transfer – as in a transfer to a grandchild thus “skipping” a generation for estate and gift tax purposes. Please remember, this is a tax in addition to the federal estate and gift tax.

For transfers during life or at death exceeding 5 million dollars, the maximum tax rate is 35% for estate, gift and GST tax. Unless Congress takes additional action, in 2013 the exemptions will drop to 1 million dollars and the maximum tax rate will increase to 55%.
Carryover basis has been repealed and stepped up basis is now the rule. Prior to 2010, stepped up basis was the rule. In exchange for being subject to estate tax at death, the heirs or devisees received a stepped up basis for income tax purposes. In layman’s terms, no capital gain tax on the increase in value during the life of the decedent. For example, 100 shares of IBM stock purchased by the decedent for $10 and valued at $100 on date of death received an income tax basis of $100 in the hands of the new owner.

The estate tax exemption of the first spouse to die is now portable. For deaths occurring in 2011 and 2012, a surviving spouse may add their DSUEA (deceased spouse’s unused estate tax exclusion amount) to the surviving spouse’s estate tax exemption without the use of a standard credit shelter trust. While this may seem like a good thing, it is a trap for the unwary. Like the other temporary tax changes, this one, too, will expire at the end of 2012.