The December 17 program primarily dealt with the compromise tax legislation that Congress had just passed and that President Obama signed that same day, the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.” A link to the Senate Finance Committee’s summary of that legislation is included at the end of this blog.
Because the announced subject of this program was federal gift and estate taxation, I dwelt on the extremely important changes made by the new legislation in that area. In short, beginning in 2011, there will be a fully “unified” federal gift and estate with a $5 MM exemption per person ($10 MM per married couple) and a top marginal tax rate of 35 percent. Thus, there will no longer be a lesser gift tax exemption than an estate tax exemption, but every taxable gift (from 1977 onward) that has used up part of a person’s lifetime gift tax exemption will be subtracted from that person’s estate tax exemption upon his or her death. Gifts that have been covered by the spousal deduction, the charitable contribution deduction, the Annual Exclusion (presently $13,000 per year per donee), and the Medical and Tuition Payment Exclusion will not be treated as having used up any part of the lifetime gift tax exemption or as having reduced the estate tax exemption at death, just as before. The increase of the gift tax exemption from $1 MM to $5 MM, subject to the corresponding possible reduction in the estate tax exemption as just described, is of huge importance to families with sufficient assets to make such large lifetime gifts.
Of even greater importance to many more families, the new legislation also provides that if one spouse dies without fully utilizing the unified $5 MM exemption - - say, by leaving everything to the other spouse in joint tenancy or by a simple will - - the executor of the deceased spouse’s estate may transfer any unused exemption to the surviving spouse. Thus, on the death of the latter, a total exemption of up to $10 MM may be available. This change, effective for decedents dying after the end of 2010, will largely mitigate the problem of “wasting” a spouse’s exemption by leaving everything to the other spouse, thus adding to that spouse’s estate without commensurately increasing that spouse’s estate tax exemption.
The new legislation also permits a retroactive application of the $5 MM unified exemption to the estates of decedents who died in 2010, subject to the executor’s election to choose to pay no federal estate tax but receive a modified carryover basis increase of up to $1.3 MM ($4.3 MM in the case of a married couple) for assets in the deceased spouse’s taxable estate. For all but the wealthiest taxable estates of such decedents, the use of the retroactive $5MM exemption, and the corresponding unlimited step-up basis for most assets (other than “income in respect of a decedent” such as IRAs), will be preferable.
The new legislation also provides for the continuation of the separate and additional Generation Skipping Tax (“GST”) at a rate of 35 percent but with an increased exemption amount of $5 MM.
It should be emphasized that these changes are temporary and will expire, like the temporary extensions of the 2010 income tax rates, at the end of two years.
I noted that in at least two respects the new legislation promoted charitable giving. First, for taxpayers taking distributions from regular Individual Retirement Accounts, it will remain possible for such distribution to be made directly to charities without being treated as taxable income to the taxpayers up to the amount of $100,000 per taxpayer per taxable year (through 2011). Second, for very well-to-do taxpayers, the temporary repeal of the “Pease limitation” on itemized deductions, including charitable contribution deductions, will make charitable contributions substantially more beneficial than they were in 2009 and previous years.
Turning from the discussion of federal transfer taxation, I wrapped up a few important points about Third-Party Special Needs Trusts and OBRA-qualified Self-Settled Special Needs Trusts that had been unintentionally omitted from the previous month’s program due to time constraints. Third-party special needs trusts are a wonderfully beneficial estate planning device for trust beneficiaries who are disabled or might become disabled, enabling them, when disabled, to enjoy a far superior quality of life than they would if they had to rely solely on governmental support. And, for those not fortunate enough to have such trusts established for them by others, it is still possible for all their nonexempt assets to be placed in a “self-settled” OBRA-qualified special needs trust that will supplement governmental support but not disqualify them for it. Assets in such trusts are not “countable assets” for Medicaid purposes.
These proven devices do not eliminate the importance of long-term care insurance planning for those in a position to afford the premiums. (Consider the general unavailability of Medicaid benefits for long-term care recipients except in nursing homes, as discussed in the November program.) But they can be essential backstops to such planning or, if necessary, alternatives to it if it has not been done.
Remember to put any legal questions that you like to me, “The Lakeshore Lawyer,” on any of the subjects covered by any of these programs. I look forward to answering them all in confidence on a no-names basis, merely discussing some of the most important questions and answers on this blog or on the program itself.
The link to the Senate Finance Committee report mentioned above appears immediately below:
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