Estate Tax Impacts of the Middle Class Tax Relief Act of 2010 (H.R. 4853)
Signed Into Law By President Obama, December 17, 2010
Many of you may have been following the tax battles in congress over the past few years. On December 17, 2010, the President signed into law the Middle Class Tax Relief Act of 2010 (H.R. 4853), extending the Bush-era tax cuts, along with many additions and changes. This tax package has a significant impact on the estate tax. I will try to outline those changes for you in brief.
Increase In the Amount a Person Can Pass at Death without Estate Tax
The amount a person is allowed to pass at death without estate tax has been increased to $5 million. Without this change to the law, on January 1, 2011, the amount a person could pass without estate taxes would have reverted to $1 million.
Decrease in Maximum Estate Tax Rate
The maximum estate tax rate is capped at 35%. Though this rate seems high, without this change in the law, rates would have return to a maximum of 55%.
Reunification of Gift and Estate Taxes
Since 2004, the estate and gift taxes have been disconnected. That is, you could pass more at death without estate tax than you could pass during life by gift. The Act reunifies the estate and gift tax. You can now pass during life or at death $5 million. Any amount you pass during lifetime by gift without tax will decrease the amount you can pass at death without estate tax consequences. Tax rates are also unified at the same maximum 35% rate.
Before the act, it was necessary to utilize special Trust plans in order to preserve the amount a person can pass at death without estate tax until the death of the surviving spouse. The Act removes this requirement by allowing a surviving spouse, by election filed with the IRS at the death of the first spouse, to increase the amount the surviving spouse can pass without estate tax by the amount of the first to die’s unused exclusion amount. This essentially doubles the amount a husband and wife can pass at death without estate tax to $10 million.
Effective for Two Years Only
The compromise with president Obama makes the changes listed above effective for only two years until January 1, 2013.
How Does This Affect Your Estate Planning?
If your net worth is less than $1 million (including the face value of life insurance) and your estate plan does not include any estate tax planning (AB Trusts), these changes will likely have no impact on you. However, estates in excess of $1 million with estate plans that contain estate tax planning (AB Trusts) should all be reviewed for potential tax impacts and opportunities in light of the new law.
The new law provides a huge opportunity for reducing estate taxes over the next two years. It also provides opportunities to lock in these savings even if the law reverts in 2013 to the old provisions with appropriate planning.
You should never take any action without consulting your tax and estate planning advisor. If you would like to discuss any of these issues with me, please call.
Jeff B. Skoubye
“Your Business & Estate Planning Resource”
Olsen Skoubye & Nielson, LLC
Attorneys at Law
999 Murray Holladay Road, Suite 200
Salt Lake City, Utah 84117
(801) 365-1030 (Main Line)
(801) 365-1012 (Direct Line)
(801) 365-1031 (Fax)
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