Since the politics of taxes dominated the media in December, most everyone is certainly aware that the 2010 Tax Reform Act passed on December 17, 2010 ("TRA 2010").  We wanted to expedite this newsletter, not only to share some observations about the new law, but also to announce our new location and website.  As a result, this is an abbreviated look at TRA 2010, deserving individual review and consideration of how it affects your personal estate plan.  The Act contains more taxpayer-favorable provisions than we can adequately address in this context, and we invite you to contact us to discuss your unique situation and our recommendations on strategies that will most effectively leave your legacy.

Estate, gift and generation-skipping tax highlights of TRA 2010:

• In 2011 and 2012, the Federal estate, gift and generation-skipping tax exemptions are "unified," with a $5 million exemption per person for each of the three.  A flat rate of 35% applies on any taxable transfers in excess of $5 million.  Most surprisingly, this provides an opportunity for taxpayers to make very substantial lifetime gifts without paying any gift tax.


• The estate and gift exemptions are "portable" between spouses, meaning generally that the surviving spouse’s estate can share unused exemption of the predeceased spouse, even without the use of a "bypass" trust.  Nonetheless, use of a bypass trust still carries many tax and non-tax advantages, which should be considered.


• No "carryover" basis rules remain for decedents’ estates (except for deaths in 2010, if "elected").  In other words, each asset receives a new income tax basis, at fair market value as of date of death, so that no capital gain occurs if said asset is thereafter sold at that value.  This has always applied to both halves of community property, meaning that the survivor’s one-half interest in the subject property receives the new basis "step up" as well as the decedent’s one-half interest therein.  An important exception to this rule, which remains, is that retirement accounts such as IRAs and 401(k)s do not enjoy the step-up in basis at death.


• Unless and until extended by Congress, these exemptions revert back to $1 million per person for transfers by gift or death after 2012 (with an inflation index on the generation-skipping tax exemption).  One unfortunate effect of the current law for deaths after 2012 (which could be corrected in a technical corrections bill) is an estate tax "recapture" of any tax-free gifts that were made during lifetime in excess of $1 million.  That is, a gift-tax "free" $5 million gift generates an estate tax if death occurs after 2012.

Bottom line: Because the benefits of TRA 2010 are effective only for two years, it is generally too soon to substantially modify estate plans to remove tax planning that may again be necessary for deaths post-2012.  The coming two years do offer a singular opportunity to take advantage of the larger gift and generation-skipping tax exemptions (even if the "recapture" issue referred to above is not ultimately corrected by law).  This two-year period may offer a window to "use it or lose it" insofar as the large gift tax exemption, and we welcome you to visit with us about the most effective strategies to employ to leave your most lasting legacy.