Here we are, into the second half of 2010, and still no legislation dealing with the estate and gift tax. As most of our readers know, the Bush tax cuts of 2001 provided for a full repeal of the estate tax, but only for the year 2010. Back in 2001 it was assumed that Congress would act before 2010 to do something other than 1) allow the estate tax to actually be repealed for 2010 and 2) allow the old law prior to 2001 to come back into effect in 2011, with the estate exemption dropping back from $3.5 million in 2009 to $1.0 million in 2011. As the days of 2010 wind down, the chances seem to be increasing that the above unexpected scenario will actually play out, with some estates winning the timing lottery due to a 2010 death, resulting in no estate tax, versus the “losers” (yes, it may be crass to put it that way) who don’t die until 2011 or thereafter and who are faced with a much smaller estate tax exemption and, hence, a bigger estate tax.
One good reason why Congress may not be too concerned about the estate tax repeal for just one year is the fact that repeal eliminated the basis step-up which has accompanied inheritances for many years. Thus, while in prior years there was a large estate tax bill, at least the heirs received a tax basis in their inherited assets equal to the value of the property on the decedent’s date of death, thereby avoiding the capital gain taxes associated with the difference between the deceased taxpayer’s cost basis and the date of death value. Except for an exemption of $1.3 million of capital gain for all estates, and another $3 million of exemption of capital gain for assets passing to a spouse, the rest of the estate will carry over the decedent’s tax basis, which will ultimately lead to more capital gains down the road.
So is there anything you can do to take advantage of 2010, short of dying before year end? If you are single and your estate is under $1 million, or if you are married and your estate with your spouse is under $2 million, and you are not expecting a big increase in the value of your estate over the next few years, then you should probably sit tight and do nothing. But if you are in a position where you have more than sufficient resources to see yourself through to the end of your days, it may be worthwhile to take advantage of the reduced gift taxes for gifts completed in 2010. The reason for this is that, although there is no estate tax, there is still a gift tax, but the top gift tax rate is only 35%. Comparing the gift tax with the estate tax, next year the estate tax will once again have a top rate of 55%. So you think you are saving 20% by using the gift tax rate instead of the estate tax rate, which is pretty good. But the actual difference is even more because the estate tax rate is “tax inclusive” which means the estate tax is imposed on what passes to the heirs, including the portion of the estate used to pay the estate taxes, whereas with the gift tax, as long as you survive three years after making the gift, the gift tax rate is “tax exclusive” which means the gift tax paid is excluded from the estate, thereby reducing the future estate tax, meaning that you don’t pay tax on the tax, so to speak. Very simply, the effective top gift tax rate this year is only about 26% when compared with the top estate tax rate of 55%, which is a difference of a whopping 29%. Also, if you wait until 2011 to make the gift, the top gift tax rate goes back up to 55%. So gifts in 2010 are definitely worth thinking about if you have the resources to part with some of your estate.
At Jeffrey Burr, for twenty-five years we have been helping clients structure their gifts in ways to maximize the gifting and to also allow our clients to retain a significant amount of control over the assets gifted. If you feel you should not let this opportunity to transfer wealth at a lower tax rate pass you by this year, give us a call to see how our various gift planning techniques might be incorporated into your future plans.
- Attorney Mark L. Dodds