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Trusts and Estates Client Alert

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December 15, 2010
Estate Tax Legislation Update

Recently the news has been full of reports about the tax deal that the President brokered with Congressional leaders, but the details of the deal had been sketchy, especially as they apply to the future of the estate and gift tax system.  Last Thursday, the Senate Finance Committee released the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Tax Relief Act).  Monday, December 13, the Senate voted to cut off debate and earlier today voted to approve the Tax Relief Act.  It is reported that the House's opposition to the Tax Relief Act has diminished and it is likely that the House will vote on the Tax Relief Act tomorrow Unfortunately, the changes proposed by the Tax Relief Act will be effective for only two years, through December 31, 2012, and at that time Congress will once again have to deal with what the estate and gift tax system should be after 2012.


If passed, the Tax Relief Act would make the following changes to the federal estate and gift tax system, many of which will apply retroactively to January 1, 2010:


  • Effective January 1, 2010, each individual would be entitled to a $5,000,000 federal estate tax exemption, which will be indexed for inflation beginning in 2012.
  • Effective January 1, 2011, the federal gift tax system will be reunified with the estate tax system.  This means that the current $1,000,000 federal gift tax exemption will increase to $5,000,000 per individual.
  • Effective January 1, 2010, the top federal estate tax rate will be 35% for estate, gift, and generation-skipping transfer taxes.
  • The executors of the estates of individuals who die in 2010 will be able to elect to have the current estate tax rules apply (no estate tax and modified carryover basis) or have the new Tax Relief Act estate tax rules apply ($5 million exemption, top tax rate of 35% and stepped-up basis in all assets for income tax purposes).
  • For 2010 the generation-skipping transfer tax exemption will be $5,000,000 and the generation-skipping transfer (GST) tax rate will be zero percent.  The GST tax rate for transfers made in 2011 or 2012 will be 35%.
  • Effective for estates of decedents dying after December 31, 2010 who leave a surviving spouse, the $5,000,000 estate tax exemption will become "portable" (inheritable by the surviving spouse), and the executor of a deceased spouse's estate will be able to transfer any unused exemption to the surviving spouse.


We are monitoring this legislation closely and will keep you informed as the Tax Relief Act continues to progress through Congress.


Although the Tax Relief Act has not yet passed, it is likely that it will include either these or similar terms.  Should the Tax Relief Act pass, we strongly recommend that clients revisit their current estate planning to determine if changes are needed.


This client alert is intended to inform you of developments in the law and to provide information of general interest.   It is not intended to constitute legal advice regarding a client's specific legal problems and should not be relied upon as such.  This client alert may be considered advertising under the rules of the Massachusetts Supreme Judicial Court.