The impact of the 2010 Tax Act on estate planning Featured

9:01pm EDT April 30, 2011
The impact of the 2010 Tax Act on estate planning

For anyone concerned about estate taxes, for almost a decade it was known that 2010 was set to be a key year. After much deliberation in Congress, on December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the 2010 Tax Act).  The Act provides a two-year acquittal from the expiration of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).

“Many of our clients have invested a lifetime in building a business and personal wealth. They feel that they have every right to transfer as much of those assets as possible to their heirs,” says Jeff Hipshman, partner, HMWC CPAs & Business Advisors in Tustin. “Of concern to estate planners, the expiration of these Bush-era tax acts would have resulted in substantial increases in income, estate, gift and generation-skipping transfer taxes. Fortunately, the passage of the 2010 Tax Act has offered a temporary reprieve of a potential massive increase in such taxation.”

Smart Business spoke with Hipshman about the 2010 Tax Act’s changes to federal estate, gift and generation-skipping taxes.

What is the status of the estate tax?

Effective January 1, 2010, the estate tax exemption amount is $5 million per person (or $10 million per married couple) and there is a maximum tax rate of 35 percent on estate transfers above the exemption amount. Also, beneficiaries of an estate are entitled to receive a ‘step up’ in the basis of the inherited property, meaning that regardless of what the decedent paid for the property, the heirs will inherit the property at the fair market value at the date of death. Looking forward, the estate tax exemption in 2011 continues at $5 million per person and $10 million for married couples. For 2012, the same exemption amounts are in effect but are indexed for inflation. Transferred assets in excess of the exemption amount will still be taxed at 35 percent.

On an estate planning note, if an individual passed away in 2010, the executor of the estate can decide to ‘opt out’ of the 2010 estate tax laws. If the executor chooses to opt out, the deceased individual’s assets will not be subject to an estate tax but the tax basis of the assets will be subject to the modified basis rules. In particular, for estates over $5 million, the executor may want to opt out but will need to evaluate the income tax aspects of subjecting the estate to the carryover basis rules. This is a fairly complicated decision and should be reviewed with a tax accountant and estate planning attorney.

How does ‘portability’ apply?

A significant aspect of the 2010 Tax Act is offering ‘portability’ of the federal estate tax exemption between married couples for the 2011 and 2012 tax years. Portability means that if the first spouse dies and doesn’t use up all of his or her federal exemption from estate taxes (i.e., $5 million), then the amount of the exemption that the deceased spouse didn’t use (e.g., $1.5 million) will be transferred to the surviving spouse’s exemption, so that he or she can use the deceased spouse’s unused exemption plus his or her own exemption (e.g., for a total of $6.5 million) when the surviving spouse later dies. To do so, an estate tax return must be filed at the time of the first spouse’s death.

What about gift taxes?

For 2010, the gift tax exemption continued at $1 million per person, while the gift tax rate remained at 35 percent. For 2011 and 2012, the lifetime gift tax exemption is $5 million for an individual and $10 million for a married couple (indexed for inflation in 2012). As with estate taxes, gifts in excess of the lifetime exemption are taxed at 35 percent. The gift tax exemption is also portable.

What are the generation-skipping tax levels?

For 2011 and 2012, the generation-skipping tax (GST) exemption amount is $5 million for an individual and $10 million for a married couple (indexed for inflation in 2012) and the tax rate on amounts over the exemption are 35 percent. This allows for tax planning opportunities over the next two years, such as gifts to grantor retained annuity trusts (GRATs) and charitable lead trusts (CLTs). However, portability of a spouse’s unused exemption was not extended for the GST exemption in the 2010 Tax Act, so if a married couple wishes to utilize GST tax planning, a trust should be created upon the first spouse’s death to take advantage of the exemption.

What about beyond 2012?

Estate planning is a continuous process. Personal situations change, such as marriage, divorce, death, wealth, etc. Further, Congress will be reviewing these laws and must address them prior to 2013, so estate planning must consider any tax law changes.

We believe that clients should regularly review their estate planning objectives, beneficiary designations, tax ramifications and other specifics of their individualized estate plan. Business owners and wealthy individuals typically desire to provide for their children and future generations, as well as to take steps to perpetuate their goals, dreams and values. At HMWC CPAs & Business Advisors, our goal in estate planning is to help clients achieve their goals in preserving, protecting and transferring their wealth.

This article is for general information purposes only and should not be construed as a professional opinion on any specific facts or circumstances. The tax advice contained in this article is not intended to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person. Professional advice should be consulted with regard to specific application of the information on a case-by-case basis.

Jeff Hipshman is a partner at HMWC CPAs & Business Advisors (, one of Orange County’s largest local accounting firms. Contact him at (714) 505-9000 to discuss how your company or client could benefit from HMWC’s estate planning services.