Saturday, December 11, 2010

Senate Bill lays out rules for Estate Taxes in 2011 and 2012

Senate Majority Leader Harry Reid has introduced legislation to enact the Obama/Republican tax cut compromise. Entitled the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” the provisions of the legislation can be reviewed through the Senate Democrats website at  

Section 3.02 of the Reid bill lays out the proposed estate, gift and generation skipping tax rules for 2011 and 2012. These include:
  • ·       $5 million dollar exemption per individual
  • ·       35% top tax rate
  • ·       Portability of the exemption for married couples. (The unused portion of an individual’s $5 million exemption can pass on to the estate of their surviving spouse.)  
  • ·       Unified Estate, Gift and Generation Skipping taxation at the $5 million level. For example, if you make a “taxable” gift $4 million dollars during your lifetime, you will have no immediate tax to pay and will still have $1 million remaining to use to offset estate taxes at your death.  (There is no change in the annual exclusion for gifts, which is currently set at $13,000 a year per done.)
  • ·       The $5 million dollar exemption is indexed for inflation, which suggests a possible extension of the rules for 2013 and later years according to an article in the Wall Street Journal.  However, the past has taught us how difficult it is to predict the future of the estate tax.   

The $5 million dollar exemptions and 35% rate will sunset at the end of 2012. Cautious individuals and couples may view the next two years as a golden opportunity to transfer wealth to future generations at very low cost.

The Reid bill is structured as an amendment of the current law that was enacted as the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001.  (Title V, Sections 501 et. Seq. of EGTRRA dealt with estate, gift, and generation skipping taxes). So, to make sense of the provisions in the current proposal, you may need to refer back to the 2001 law. Here is a link to EGTRRA You will also want to have the Internal Revenue Code handy – it’s available online at this link:

According to the Wall Street Journal article, the Senate plans to vote on the bill on Monday.  

The bill also extends for two years all of the Bush era tax cuts for all taxpayers including current lowered rates on capital gains and dividends. It also extends unemployment benefits, grants a one-year payroll tax cut of 2% for nearly all workers, reduces the alternative minimum tax, and provides various tax credits. 

A Senate Finance Committee summary of the bill is available here

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