Obama Signs Major Income & Estate Tax Cuts; Big Benefits For Wealthy
Last Updated: 12/17/2010 10:38:06 PM
On 12/17/2010, President Obama signed major legislation implementing the tax-cut deal negotiated with Congressional Republicans. As expected the legislation restores the estate tax for two years with an exemption of $5 million and a 35 percent tax rates for estates over that amount, but the new law also contains several unexpected provisions that would make it easier for the well-off to transfer their wealth tax-free.
One of the provisions makes the new $5 million exemption and 35 percent rate retroactive to January 1, 2010. In other words, the heirs of those dying in 2010 will have a choice between applying the new rules or electing to be covered under the rules that have applied in 2010 — no estate tax but only a limited step-up in the cost basis of inherited assets. This would benefit the heirs of tens of thousands of more modest estates which, under current rules applying for 2010, are subject to capital gains tax on inherited assets above a certain threshold.
A second provision makes the estate tax exemption “portable” between spouses. This means that if the first spouse to die does not use all of his or her $5 million exemption, the estate of the surviving spouse could use it.
A third provision sets the gift tax and generation-skipping transfer tax exemptions at $5 million as well. (For 2010 there is no generation-skipping tax, while the gift tax exemption has been $1 million for a number of years.) A 35 percent tax rate would apply to gifts or transfers over the $5 million threshold. These high exemption levels mean that the wealthy will now have a two-year window in 2011 and 2012 to protect huge amounts of their estates from taxation for generations: by using sophisticated estate planning strategies, the increased gift tax exemption can be used to “leverage” huge transfers of wealth to future generations.
The new law is H.R. 4853, the ”Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010”
We will be writing more on topic in the very near future. Stay tuned.