G&G Law Alert Estate Planning - HTML

G and G law Alert Wills Trust Estates
Alerting Leaders to Key Legal Developments May 14, 2010

(updated 5/31/11)

The Tax Relief Act of 2010, enacted at year end, significantly affects estate planning. However, the rules enacted apply ONLY for years 2011 and 2012! We revisit these matters again in two years.

Rate Reduction

The Tax Relief Act reduced the maximum estate tax rate from 55%, as scheduled to be effective in 2011, to 35%. The rate is scheduled to revert to 55% in 2013, unless there is further change in the law.

Exclusion Increase

Perhaps the most notable change effected by the Tax Relief Act is to raise the gift and estate tax exclusion and the Generation Skipping Tax exemption to $5,000,000 per person. Again, this change is effective only until 2013, when the exemption is scheduled to return to $1,000,000. This would suggest the need for aggressive planning now.

Stepped-Up Basis Restored

The "carry-over" basis rules for inherited property, existing for 2010, were replaced. Inherited property now receives a new basis, "stepped-up" to the fair market value at the decedent's date of death (subject to a permissible election to extend the time for six months). For estates of decedents dying in 2010, the executor can elect to use the former carry-over basis rules instead of the stepped-up basis rule. In some cases, such an election can be advantageous. The considerations for 2010 estates are complicated and must be analyzed for each separate case.


This provision of the Tax Relief Act provides that the estate of the surviving spouse can utilize the unused portion of his/her deceased spouse's exclusion amount. Thus, if a husband dies with an estate valued at $2,000,000, the wife is able to utilize the remaining amount of his exclusion (5,000,000-2,000,000=$3,000,000) in addition to her own exclusion amount. The unused portion of the deceased spouse's exclusion may be applied against lifetime gifts of the surviving spouse as well as at his/her death. The availability and use of unused exclusion amounts should now be a topic of discussion in pre- and post- nuptial agreements in second marriages.

A requirement of this "portability" is that an estate tax return must be filed for the decedent spouse. This requirement may be overlooked as the executor of a non-taxable estate of a decedent (ie, under $5,000,000) is not required to file a return. If the surviving spouse remarries and is again widowed, he/she loses the unused exclusion amount of the first decedent spouse.

Because this provision is set to expire in two years, we recommend the continued use of By-Pass Trusts to employ the exclusion amount of the first spouse to die. All appreciation of assets inside the By-Pass Trust avoids estate taxation upon the death of the second spouse.

Generation Skipping Trusts

For trusts established in 2010 which include generation skipping transfers, it was uncertain whether the Generation Skipping Transfer tax exemption should be applied because the GST rate in 2010 was zero. These trusts should be reviewed to determine whether the GST exemption should now be applied and, if so, what steps should be taken with regard to such trusts.

2013 and Beyond

As noted the Tax Relief Act applies only to years 2011 and 2012. If Congress fails to extend the provisions thereafter, the law reverts to 2001 law, to wit: Exclusion of $1,000,000 from gift and estate tax and a top transfer tax rate of 55%. The portability feature will also expire.


©2010 Gammon & Grange, P.C. , a law firm serving nonprofit organizations and businesses throughout the United States and abroad. Readers may freely copy and distribute this Alert in full without modification.

Disclaimer: This memo is provided for general information purposes only and is not a substitute for legal advice. The transmission of this memo does not create an attorney/client relationship. No recipients of this memo should act or refrain from acting on the basis of this memo without seeking professional legal counsel. Gammon & Grange, P.C. expressly disclaims all liability relating to actions taken or not taken based on the content of this memo.