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Jeff Grange: What You Should Know About Recent Tax Law Changes

Federal legislation offers certainty — at least for two years — on gift, estate and generation-skipping transfer taxes

Changes to the federal gift, estate and generation-skipping transfer tax laws passed by Congress last December could have significant effects on individual estate plans for the next two years.

Jeff Grange
Jeff Grange

The passage of the act brings some welcome certainty for estate planners with respect to transfer taxes. Now we have a markedly new transfer tax regime in place for this year and next year, and clearer choices for estates of decedents who died in 2010. However, we face continued uncertainty over long-range planning, because the act is scheduled to sunset on Dec. 31, 2012.

Estate Tax Changes

Once again we have a federal estate tax in 2011 and 2012, but with a lower maximum rate than we expected: 35 percent. In addition, the act increased the applicable exclusion amount — often referred to as each person’s “estate tax exemption” — to $5 million, the highest it has ever been.

The act also introduced a new “portability” feature, which allows a surviving spouse to take advantage of the unused exemption of a predeceased spouse who died after Dec. 31, 2010.

Gift Tax Changes

The 2010 gift tax exemption amount was $1 million, with a maximum gift tax rate of 35 percent on gifts in excess of that amount. The 35 percent rate was a historically low gift tax rate that was scheduled to rise to 55 percent on Jan. 1, 2011. The act extended the maximum 35 percent gift tax rate and increased the gift tax exemption amount to $5 million for 2011 and 2012, which made it more beneficial in many cases to postpone 2010 gifts into 2011 or 2012.

The act also “unified” the estate and gift tax exemptions, meaning that every U.S. citizen or resident taxpayer has a total exemption of $5 million that can be used on lifetime or testamentary gifts before the gift or estate tax will apply to their transfers.

Generation-Skipping Transfer Tax Changes

The act imposed the GST tax retroactively for 2010 and increased the GST exemption amount to $5 million. The act also lowered the GST tax rate to 35 percent for 2011 and 2012. The combination of a lower GST tax rate and a higher GST exemption creates planning opportunities this year and next year that may disappear if the tax rate rises, or the exemption shrinks, after 2012.

— Jeff Grange is a financial advisor for Crowell, Weedon & Co. Santa Barbara, 111 W. Micheltorena St., Suite 200. For more information, click here or call 805.618.3160

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