The AALU has played a leading
role in pushing for permanent
estate tax reform that is fiscally
sustainable to enable clients to plan with
certainty. Reunification was enacted
in December as part of the Tax Relief,
Unemployment Insurance Authorization
and Job Creation Act of 2010, which
is examined in this article.
Effective Dates of Estate and GST
Tax Increased Exemptions; Carryover
The increased ($5
million) estate and GST exemptions
and 35 percent rate were effective Jan. 1,
2010 (making them the default option for
2010, i.e., the increases are retroactive to
the beginning of 2010), but the proposal
allows an election to choose between
the 2010 law (no estate tax and modified
carry-over basis) or the 2011 law ($5 million,
35 percent and step-up in basis) for
estates of decedents dying on or after Jan.
1, 2010, and before Jan. 1, 2011. No matter
which option is chosen, the decedent
could still treat any testamentary generation-
skipping transfer, as having a "transferor"
for GST tax purposes. For example,
the "move down" rule, which moves the
transferor of any GST transfer down one
generation for the purpose of determining
the taxability of future distributions
and terminations, would apply. For executors
for decedents who died during 2010
with very large estates, the option to apply
the carry-over basis and avoid the estate
tax may be an easy decision. Executors
for those decedents who died with estates
closer to the $5 million mark, however,
may have a difficult decision to make, as
the complications of the carry-over basis
may incline them to pay a small estate tax
in exchange for a full step-up.
Reunification of the Estate and Gift
Under EGTRRA, the estate and
gift taxes were "decoupled," so that, by
Dec. 31, 2009, the estate and GST tax
exemptions were equal to $3.5 million
per person ($7 million per couple), while
the gift tax exemption remained at $1
million per person ($2 million per couple).
The new law reunified the estate and
gift taxes, effective for gifts made after
Dec. 31, 2010. Even if the "reunification"
ends on schedule on Dec. 31, 2012, there
will be a two-year window to transfer up
to $10 million per couple during life without
Portability of Unused Exemption.
Under the law as it existed on Dec. 31,
2009, in order to take full advantage
of a husband's and wife's combined $7
million estate tax exemption, the first
spouse's exemption amount would have
to be held in a "credit shelter" or "bypass"
trust, thus requiring complicated estate
planning. The new law allows the executor
of a deceased spouse's estate to transfer
any unused exemption to the surviving
spouse without creating a trust.
The portability provision applies only
with respect to "the last such deceased
spouse of [the] surviving spouse," thus eliminating
the possibility of accumulating exclusion
amounts from serial marriages. The portable amount is
also not indexed for inflation.
Planners should be aware, however, that
a bypass-type trust may still be useful for
sheltering appreciation in assets placed in
the trust, as well as for all the reasons that
trusts are typically used, such as creditor
protection and divorce/second marriage
protection. For these reasons, among others,
a bypass trust should always be included
as an option that can be elected, via disclaimer,
even with portability. We note that
the "portability" election must be made on a
return, which means that even estates that
are not subject to tax will probably want to
file a return to make the election.
"Pay-Fors." The legislation contained
none of the revenue offsets that have been
included in previous bills, such as limitations
on GRAT terms and remainders,
restrictions on discounts for family-held
entities, and uniformity of basis for estate
and income tax purposes. This will make
the heretofore uncertain advantages of
short-term GRATs in the current lowinterest-
rate environment more certain,
and hence more appealing. It should also
increase the availability of other "freeze"
transactions, such as sales to intentionally
defective grantor trusts, that rely
heavily on valuation discounts.
GST Tax Allocation Issues. Virtually
all the GST tax allocation issues for
transfers to life insurance trusts during
2010 are resolved satisfactorily by the
inclusion in the Revenue Code of Section
2664 ("This chapter shall not apply to
generation-skipping transfers after Dec.
31, 2009."). That section was added to the
Code by EGTRRA, in the group of provisions
that are "reinstated" to read as if
their amendment by EGTRRA "had never
been enacted." The "reinstatement" of
pre-EGTRRA law in this regard is effective
for "estates of decedents dying, and
transfers made, after Dec. 31, 2009." This
means that the ability to allocate exemption
(and to opt out of the automatic allocation
of exemption) to 2010 transfers is
reinstated as well.