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REINSTATEMENT OF THE FEDERAL ESTATE TAX

As you probably have heard or read by now, the federal estate tax has been reinstated effective January 1, 2011. This reinstatement is for two years, that is it will expire on December 31, 2012 unless additional changes are made by the Congress. For decedents dying on and after January 1, 2011, the unified credit is $5 million. This is an increase of $1.5 million from the unified credit in effect as of December 31, 2009. Additionally, the estate tax rate has been reduced from 45% to 35% for the same period. Because of the increase in the unified credit this is also the beginning rate for the federal estate tax. That is, all amounts in excess of $5 million in a decedent's estate will be taxed at 35%.

There are two significant changes from prior law. First, is permitting the use by the surviving spouse of the unused unified credit of the deceased spouse. For example, if the value of the estate of the first spouse to die is $4 million, there will be $1 million unused unified credit. Now, this may be utilized by the second, or the surviving spouse, for that spouse's federal estate tax. That is, on the death of the surviving spouse, the first $6 million of the surviving spouse's estate, not $5 million, will be exempt from federal estate tax. This is called "portability" and is a new concept for the federal estate tax.

The second significant change is the unification of the unified credit for the estate and gift taxes (there has been unification of the estate and generation skipping taxes). This means that the unified credit applicable to gift taxes beginning in 2011 will be $5 million, not the $1 million that has been in effect through December 31, 2010. The annual exclusion remains in place and has not changed for 2011. It remains at $13,000.00.

Finally, for estates of decedents dying in 2010 executors or administrators have the right to elect to have those estates taxed under either the 2010 or 2011 rules. As you may recall in our memo of year ago, we pointed out that the price of the elimination of the estate tax was the elimination of the basis step-up at death and the reinstitution of carry-over basis. Although there was a $1.3 million exemption to this carry-over basis rule, in larger estates the carry-over basis remained a problem. It is likely that those estates of $5 million or less will elect to be taxed under the 2011 rules. Such election would provide for no federal estate tax and a step-up in the tax basis of the assets received from the decedent.

The Law Firm of Nikolaus & Hohenadel, LLP has extensive experience in the areas of Wills, Trusts and Estate Planning. If you have any questions, you may contact us in our Lancaster Office at 717-299-3726, or in our Columbia Office at 717-684-4422.

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