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The Proposed Tax Legislation and You

In S8721, S. Amend.4753 amending H.R.4853, there is some good news with respect to the long in limbo future of federal estate and gift tax legislation for taxable years beginning after December 31, 2010.   Further, it appears that the estate and gift tax amendments are likely to pass both houses of Congress this year, though nothing is certain in the current legislative environment.

Under the proposed legislation, the amount of a decedent’s taxable estate excludable from estate tax would be $5 million.  For years beginning in 2012, the exclusion amount would be indexed for inflation.  While the provisions of the proposed legislation will sunset with the entirety of the proposed tax package, this time as of December 31, 2012, the inflation index provisions as to these provisions may be an indication that there exists some consensus that the estate and gift tax components of the current tax bill may represent appropriate long-term policy.

The maximum tax rate on taxable estates is capped at 35%, a rate that is reached at $500,000 of taxable estate.

The proposed legislation also permits taxpayers to elect whether to use the estate tax regime existing in 2010 or 2011.  The importance of this provision is implicated by capital gains rates and basis rules for 2010.  Under the rules for 2010, heirs or devises take property of the decedent at the basis of the decedent, usually the acquisition cost.  Thus, when the heirs or devises sell inherited property, they may pay capital gains tax on significantly higher amounts than if they took the property at the fair market value included in the gross estate of the decedent.  Under the proposed legislation, the heirs or devises would take the property at the amount includible in the gross estate of the decedent.  The combined estate tax, if any, and the resulting lesser capital gains tax to the heirs or devises may be significantly less under the proposed legislation.

The unused exclusion amount of decedent spouses is made available to surviving spouses.  Under legislation existing prior to 2010, often if a married couple did not have appropriate advice, or their circumstances made such planning inappropriate, all or a significant portion of the first to die’s exclusion amount was lost.  If the first-to-die spouse left all of his or her assets to the remaining spouse without an appropriate trust, the excludible amount remaining of the first-to-die spouse was lost and the assets of the first-to-die spouse were added to the gross estate of the remaining spouse.  This result had the potential to increase the remaining spouse’s taxable estate to an amount that would cause it to be taxable.  The proposed legislation adds Sec. 303, “Applicable Exclusion Amount Increased by Unused Exclusion Amount of Deceased Spouse.”  The effect of this section is to shift any unused exclusion of a decedent spouse to the remaining spouse.  This provision will require spouses, and their tax advisors, to think carefully about whether certain trusts are appropriate in the future.

Finally, for the first time, the estate, gift, and generation skipping tax would be unified, with a $5 million per individual exclusion for all three.  There are some nuances that could be tricky; however, for taxpayers wishing to generation skip, there are some potential significant advantages.

In sum, individuals whose taxable estates will be less than $5 million and married couples whose estates will be less than $10 million may breath a slight sigh of relief.  All, however, should continue to monitor proposed legislation.  Finally, estate planning is always a good idea regardless of estate tax consequences.

Tarley Robinson, PLC, Attorneys and Counsellors at Law, Williamsburg, VA

Neal Robinson

Neal specializes in corporation and business entity law, mergers and acquisitions, business planning and strategic analysis. His clients have ranged from start-up operations to well established organizations.

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