Steve Akers
Martin Shenkman   Steve Akers
Wait, Don’t Throw Momma From the Train (Yet)

How many taxpayers are really hit by the estate tax? Based on the press, readers would think a rather large number.

May 19, 2011
by Martin Shenkman, CPA, PFS and Steve Akers, JD

In December 2010, President Barack Obama signed tax legislation that fundamentally changed the federal estate tax (well, for a while). Estate planning will never be the same. Estate planning may be­come more focused on what is really important: people, nontax issues, asset protection, management and investment of assets and so on.

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRA) was assigned a Public Law number, P.L. 111-312 and was signed into law on December 17, 2010.

The fact that estate planning will be different means that it cannot be ignored.

The following discussions are organized in the order of the actual provisions contained in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRA) passed by the United States Senate. In some instances, the actual provisions or excerpts of them are provided. Although this approach is perhaps easier for a tax professional to follow then a consumer, it seemed a logical approach to the explanation of the new law. The actual statutory provisions are printed in italics.

Repeal of Economic Growth and Tax Relief Reconciliation Act of 2001 Provisions

TRA Section 301(a) provides:

In general. — Each provision of law amended by subtitle A or E of title V of the Economic Growth and Tax Relief Reconciliation Act of 2001 is amended to read as such provision would read if such subtitle had never been enacted.

The repeal of the estate tax (that is, subtitle A) is repealed, so that the estate tax applies to the es­tates of a person who died in 2010. The carryover basis rules (which were in subtitle E) no practitioner wanted to have to deal with are repealed as if they had never been enacted. The only exception will be for those estates for which the executor elects to apply the carryover basis rules, instead of the estate tax, based on the optional provision for which the TRA provides (see subsequent discussion). Carryover basis, as explained in considerable detail in chapter 4, is a tax system in which an estate is not subjected to the federal estate tax, but in exchange it loses the ability to increase (step up, but more technically, adjust) the tax basis (cost and investment) of appreciated assets held at death to their fair value. The complexity of these rules makes tax experts shudder. If you’re not dealing with an estate of someone who died in 2010 (and generally one that is in excess of $5 million), you may never have to understand or deal with these carryover basis rules.

New Exemption Amount and Rate

The TRA sets the estate, gift and generation-skipping transfer (GST) exemption at $5 million per person and $10 million per married couple.

TRA Section 302(a)(1) and (2) provides:

Modifications to estate, gift and generation-skipping transfer taxes. $5,000 Applicable Ex­clusion Amount.— (2) Applicable exclusion amount. — (A) In general. — For purposes of this subsection, the applicable exclusion amount is $5 million.

The exemption changes apply for 2010 going forward, except that the gift exemption remains at $1 million for 2010.

Planning Note

Everyone should review his or her will, revocable trust and other dispositive arrangements to be certain that their plan will work as intended with this dramatic increase in the estate tax exemption.

A tax rate of 35 percent will apply for all the federal transfer taxes: the estate tax applicable at death, the gift tax applicable onto lifetime (intervivos) transfers and GST tax beginning in 2010. The 35 percent rate had already applied to taxable gifts in 2010. If the executor of an estate for someone who died in 2010 chooses to be subject to the estate tax instead of the carryover basis rules, the 35 percent rate will apply as well.

To assure some air of sophistication for tax experts, the new law introduces some new lingo with the new exclusion (And we needed new jargon, right?). The $5 million exclusion is now called the basic ex­clusion amount. It was an artist formerly known as the applicable exclusion amount or TBFKAAE (tax benefit formerly known as applicable exclusion). Did Prince help write this stuff? This is explained more fully later in the discussion of portability.

Wait, Don’t Throw Momma from the Train (Yet)

With the new $5 million exemption, the more macabre impact of one-year estate tax repeal will hope­fully be minimized and avoided by most taxpayers. Fewer would-be heirs of aging wealthy benefactors will be inclined to have their benefactors watch the dropping of the ball in Time Square from the top of the Empire State building (watch the banana peel!). Simply put, if Momma has an estate valued at less than $5 million, there will be no federal estate tax in 2010 or 2011. Prior to the TRA changes, if Momma had a $5 million estate — and if Danny DeVito didn’t throw her from the train in 2010 — a $2 million es­tate tax would have been due in 2011 with what would have been a mere $1 million exclusion. The fact that most benefactors’ estates will continue to be exempted from estate tax in 2011 eliminates the need for such self-help tax minimization. Ultra-high net worth taxpayers continue to be advised to celebrate pre-New Year festivities in safer ground level locations … and to avoid trains.

This article has been excerpted from Estate Planning After the Tax Relief and Job Creation Act of 2010: Tools, Tips and Tactics. You can purchase the book at www.cpa2biz.com.

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Martin M. Shenkman, CPA, MBA, PFS, AEP, JD, is an attorney in New Jersey and New York City. His practice concentrates on estate and closely held business planning, tax planning and estate administration. Steve R. Akers, JD, is an attorney with 33 years of experience in estate planning and probate law matters. He is a managing director at Bessemer Trust. Editor Note: The authors are donating 100 percent of the royalties from this book’s sales to the following three foundations: Michael J. Fox Foundation for Parkinson’s Research, National Multiple Sclerosis Society and the Association of Hole in the Wall Camps.

* The AICPA’s Personal Financial Planning Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and closely held entities. The Personal Financial Planning Section is open to all Regular Members, Associate Members and Non-CPA Section Associate Members of the AICPA. If you are a CPA who wants to demonstrate your expertise in this subject matter, become a Personal Financial Specialist Credential holder. Visit www.aicpa.org/PFP to learn more.