House Passes The Middle Class Tax Relief Act of 2010, H.R. 4853

Well, despite some last minute (attempted) shenanigans, President Obama has a shiny new piece of tax legislation on his desk this morning that he is expected to sign.

In addition to continuing the “Bush Tax Cuts” for two years and exetnding long-term unemployment benefits there are some sweeping changes to the estate tax.

Here is a summary of the changes to the estate tax, by the Senate Committee on Finance:

  • Temporary estate, gift and generation skipping transfer tax relief. The EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.
  • Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.
  • Reunification. Prior to the EGTRRA, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.

None of the lingering questions have been answered and, as this is only a two-year deal people are already talking about the chilling effect this could have on everything from planning (income tax planning, estate tax planning, etc…) to gifting.  I’m not so sure about all that but we’ll see.

One interesting side note is the GST loophole some commentators have pointed out in the new legislation.  The ever-informed Wills, Trusts & Estates Prof Blog has a nice and succinct summary (posted here):

The tax bill passed by Congress confirms a 0% GST tax rate for 2010 and creates an additional loophole that was unavailable when I blogged about a possible payday for trust babies.

In addition to outright gifts qualifying for the 0% rate, money put in a trust in 2010 for the grandkids also qualifies for the 0% rate. This means that money can be declared subject to the 2010 GST tax, “prepaid” at a 0% rate, and deposited in a new trust for the grandkids’ benefit.

Because this transfer would still be subject to the gift tax, this technique is even more beneficial if money is already in a “non-exempt” multigenerational trust and is transferred into a new trust. This money has already been subjected to the first layer of gift or estate tax, so no additional taxes would be owed.

Not all non-exempt multigenerational trusts can cash in on this GST tax loophole. For example, the trustee must have a lot of discretion for it to work. Additionally, only 11 states (Alaska, Arizona, Delaware, Florida, Indiana, Nevada, New Hampshire, New York, North Carolina, South Dakota, and Tennessee) have decanting provisions, allowing trust property to be moved to another trust for the benefit of a beneficiary. However, out of state trusts can take advantage of Alaska’s decanting law.

And a newcomer – to my blogroll at least – Hani Sarji is who first pointed out this news to me on his great blog, Estate of Confusion.

Here are resources for Reid’s legislation:

  • Summary (PDF) by the Senate Committee on Finance
  • Full text (PDF) — The bill is 74 pages long. Title III (pages 8-19 of the PDF) would reform the estate tax: “Temporary Estate Tax Relief.”

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