The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law on December 17, 2010.  The federal estate tax was retroactively reinstated for 2010, at a top rate of 35%, and that rate applies to estates of individuals dying in 2010, 2011, and 2012. The $5 million basic exclusion amount, effective in 2010, 2011, and 2012, will be indexed for inflation in 2012.  In addition, Congress enacted a "portability" provision for any unused exemption in the estate of the first spouse to die:  For 2011 and 2012, when one spouse dies, any unused portion of that spouse's estate tax exemption equivalent amount may be transferred to the surviving spouse.

With regard to federal gift and generation-skipping transfer ("GST") taxes, for 2011 and 2012, there will be a $5 million lifetime gift tax exemption equivalent at the estate tax top rate of 35%.  The GST tax exemption amount for 2010, 2011, and 2012 is $5 million; a 0% tax rate applies for 2010, and the same estate tax top rate of 35% applies for 2011 and 2012.

Much has been made of this bill, especially by GOP lawmakers who claimed it "raised" the federal estate tax.  While technically this is accurate because there was no federal estate tax in 2010, due to the "sunset" provisions of EGTRRA, passed in 2001, in fact Congress simply continued the trend evident in the EGTRRA legislation, namely, a steadily increasing exemption amount (which had reached $3.5 million in 2009) and descending estate tax top rate (45% in 2009).  While Democratic lawmakers howled about the decrease in the top tax rate to 35%, it was probably necessary to lower it to that figure to garner sufficient GOP support for passage of the tax bill.

Bear in mind this is essentially a "punt" - the provisions outlined above expire at the end of 2012, so Congress will have to re-visit this estate tax / gift tax / GST tax issue all over again next year.  But at least the legislation provides a structure on which to base solid estate planning, and some sense of where these taxes are probably headed after 2012.