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CURRENT (2011) FEDERAL ESTATE TAX RATES

Wednesday, March 23, 2011

The Federal Estate Tax changed in the final weeks of 2010. Estate tax laws were modified by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Tax Relief Act”), which was signed into law on December 17, 2010.  Some changes in the 2010 Tax Relief Act are retroactive to specifically affect decedents who died in 2010. No changes are retroactive going back beyond 2010. 

 

Here’s the current federal estate tax table:

(TE = taxable estate = gross estate less

exclusions:  m = million)

2008-1st $2 m of TE excluded,balance  @ 45%

2009-1st $3.5m of TE excluded,balance @ 45%

2010-Executor has options – see below

2011-1st $5 m of TE excluded, balance @ 35%

2012-1st $5 m of TE excluded, balance @ 35%

    

For both 2011 and 2012 (and 2010 if the 2011 option is selected) the $5 million exclusion is portable, meaning if a spouse doesn’t use all of his or her $5 million exclusion the survivor can use some or all of it.  Portability is limited to spouses.

 

OPTIONS - for those administering estates of 2010 decedents:

1) Elect to accept the rules in effect prior to the 2010 Tax Relief Act.  This election must be made no later than September 19, 2011.  These new rules provide a $5 million estate tax exemption,  a 35% estate tax rate and a full stepped-up basis for most assets included in the gross estate, or

2) The executor may (do nothing and) choose to accept the federal estate tax rules for 2010 Estates which include no federal estate tax but also no stepped-up basis for assets.

 

Note: There are exceptions to the no stepped-up basis rules:

The exceptions are:  If the 2010 rules are selected the heir can choose to take a step-up in basis for $1.3 million of the property. For any amount inherited over $1.3 million, the heir's basis will be the smaller of the deceased owner's basis or the date-of-death-market value. The basis of property passing to a surviving spouse can be increased by an additional $3 million for a total basis increase of $4.3 million.  Basis of property given to the decedent by someone other than his/her spouse within 3 years of death cannot be increased.

 

GROSS ESTATE:

Generally, the Gross Estate does not include property owned solely by the decedent's spouse or other individuals. Lifetime gifts that are complete (no powers or other control over the gifts are retained) are not included in the Gross Estate but taxable gifts, if any, are used in the computation of the estate tax because they reduce the lifetime exclusionary amount. Life estates given to the decedent by others in which the decedent has no further control or power at the date of death are not included.

 

The usual deductions taken to reduce the gross estate for federal estate tax purposes include the following: 

1) Marital Deduction: All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass "outright." In some cases, certain life estates also qualify for the marital deduction.

2) Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.

3) Gifts - For 2011/2012 the gift exclusion amount is $5 million.

4) Mortgages and debt.

5) Administration expenses of the estate.

6) Losses occurring during estate administration.

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