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New Rates, New Exemptions, New Gifting Opportunities

Trusts & Estates, our sister publication (suscription required) says that, "The 2010 [Tax] Act opens the door to creative planning techniques."

New Rates, New Exemptions, New Gifting Opportunities

The 2010 Act opens the door to creative planning techniques


On Dec. 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the Act). Among other things, the Act makes changes in the tax law for calendar years 2011 and 2012 that: (1) increase the applicable exclusion amount for estate and gift taxes, (2) increase the generation-skipping transfer (GST) tax exemption, (3) reduce the top estate, gift and GST tax rates to 35 percent, (4) reunify the credits against gift and estate tax, and (5) create portability of the unused estate applicable exclusion amount of a deceased spouse. These changes have long- and short-term consequences, so advisors must consider the impact of the Act when advising their clients about estate-planning strategies and decisions. Here's an overview of the changes in the gift tax laws, planning opportunities and how those opportunities may be integrated with changes in the estate and GST tax laws.


Here are the specifics of the Act:

Exclusion amounts/tax rates — The applicable exclusion amount for estate and gift tax is increased to $5 million per person in 2011 and 2012. The exclusion amount may be increased by an inflation adjustment for calendar year 2012 (Section 302(a) of the Act). The GST tax exemption also is increased to $5 million per person, effective as of Jan. 1, 2010 and may also be increased by an inflation adjustment for 2012. The top estate, gift and GST tax rates are 35 percent (Section 302(a) of the Act).

Reunification — Section 301(b) of the Act “reunifies” the gift and estate tax applicable exclusions by making the gift tax exclusion equal to the estate tax exclusion. If a taxpayer made taxable gifts using his gift exemption when it was $1 million, or even if a taxpayer made gifts greater than that amount and paid gift tax, he still has the ability to gift up to $4 million more without incurring a gift tax. New Internal Revenue Code Section 2001(g) ensures this result.

Portability — Section 303(a) of the Act provides that under most circumstances, any unused applicable exclusion amount remaining at the death of a spouse (who dies after Dec. 31, 2010), can be used by the surviving spouse. Note that it's the unused exclusion amount of the surviving spouse's last spouse that can be transferred — not the unused amount of a prior deceased spouse. For example, if a surviving spouse hasn't used any applicable exclusion and his most recent deceased spouse didn't use any applicable exclusion, the surviving spouse can gift $10 million during his lifetime, and no tax will be due. If a surviving spouse makes a gift of$4 million (exclusive of IRC Section 2503 gifts) during his lifetime, there will be $6 million of unused exclusion amount available at his death for his surviving spouse. Note that portability doesn't apply to the deceased spouse's unused GST tax exemption, if any. (For more information on the portability provisions, see “Bypass the Bypass Trust?” p. 24.)


With the increase in the applicable exclusion amount for gifts (and the possibility of portability of an additional amount) and the reunification of the estate and gift tax credit, clients can more fully utilize well-settled gift planning techniques. Also, clients can consider additional techniques not customarily used because of the prior $1 million lifetime gift tax exemption limit.

The exclusion amount increase promotes the three basic tenets of gifting — using discounts, excluding appreciation from the taxable estate and potentially avoiding state estate tax. Clients can now gift more proactively. To reduce taxable gifts, most gifting techniques contemplate using lack of marketability and minority interest discounts, or leveraging applicable federal rates (for example, the Section 7520 rate). Clients now can gift larger amounts before a gift tax is paid. If the gift tax is due, its top rate is 35 percent, which is the same rate as for 2010, but less than the 2009 rate of 45 percent. The tax exclusive treatment for gift taxes paid by donors living at least three years from the date of the gift (rather than the tax inclusive treatment for estate taxes) continues to make gifting attractive for those who have sufficient liquidity to pay the taxes, especially at a reduced rate of 35 percent.

Moreover, many states don't impose a state gift tax, but do impose a state estate tax. Depending on a client's domicile, he can achieve considerable overall estate tax savings by gifting during his lifetime. For example, if a client gifts $5 million during his lifetime (with no state gift taxes), state estate taxes may be avoided on the amount of the gift that would have been subject to state estate taxes. Federal estate tax will be larger because the deduction for state estate taxes will be less. However, for those clients domiciled in states without a gift tax, making lifetime gifts will reduce the overall combined federal and state estate taxes.

To subscribe and gain access to full article, go to Trusts & Estates. (The article is too long to be re-published here.)

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