Estate and Gift Tax Law Highlights (2012)

Startlingly, Congress passed a very favorable gift and estate tax law which not only applies in 2011 and 2012 but can be retroactive for estates of decedents who died before December 17, 2010.  A brief summary follows:

Gifts
Beginning January 1, 2011, individuals can give up to $5 million (or $10 million per couple) free of gift tax, reduced by any portion of the exemption used in prior years.  Gifts over $5 million will be subject to a 35% tax rate.  New York still does not have a gift tax.

Estates
Beginning January 1, 2010, the estate tax is reinstated with a 35% rate, a $5 million exemption and stepped-up basis for all assets included in the estate for estate tax purposes.  However, for the estates of decedents who in 2010, before the date of enactment, the Executor can elect out of estate tax in favor of the carryover basis rules, with an allocation of $1.3 million of basis step-up and an additional $3 million for assets passing to a surviving spouse.

Portability
This is new and is currently applicable only to decedents dying after January 1, 2011 and before December 31, 2012. If an estate tax return is filed for a decedent and an election is made, the surviving spouse can use the unused estate tax exemption amount of the deceased spouse.  Unless the law is extended, both spouses must die within the two year period (2011 and 2012) for this provision to apply.  Also, note that any unused GST exemption of a predeceased spouse is not portable to the surviving spouse.

GST Taxes
The GST tax is reinstated effective January 2010, with a $5 million exemption.  However, the tax rate is 0% for 2010 transfers.  The rate increases to 35% effective January 1, 2011.  The historically low rate is an opportunity if you are interested in GST planning, specifically direct gifts or gifts in trust for grandchildren.