After much wrangling and politics, on December 17th, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, otherwise known as “TRA 2010.” The law did many things:
- Temporarily extended the Bush-era income tax cuts,
- Temporarily extended the program extending unemployment insurance benefits,
- Temporarily cut employee’s FICA tax by 2%, and
- Temporarily provided estate tax relief.
From an estate planning perspective, the new law set the amount that could pass without an estate tax at $5 million per person for 2010-2012. However, the new law is temporary and will expire after 2012. In 2013, the amount that can be passed free from tax will go back down to $1 million per person. Thus, unless the law is changed again between now and then, someone dying in 2013 would only be able to pass $1 million without an estate tax.
As before, you can use a portion of that exclusion to make lifetime gifts, but then it would not be available at death. In 2010, you can use up to $1 million of your exclusion during your lifetime. In 2011 and 2012, you can use your whole $5 million exclusion during life. Of course, then you would not have any available at death.
Congress also introduced a new “portability” provision. This is where one spouse can add their deceased spouse’s remaining estate tax exclusion to their own exclusion to shelter more from taxes. This portability provision, also known as the “Deceased Spousal Unused Exclusion Amount,” can be used to shelter the assets of the surviving spouse. While intriguing on the surface, under current law this portability tax benefit only happens if both spouses die in 2011 or 2012. If either spouse hangs on until 2013 or beyond, there is no portability option available.
In addition, the new law reduces the top estate and gift tax rate to 35% in 2010-2012. However, a top rate of 55% returns in 2013 and thereafter.
So, what’s the gist of the new law? Prior to TRA 2010 we were facing a return to the $1 million estate tax exclusion on January 1, 2011. Now, we are still facing a return to the $1 million estate tax exclusion; it’s just put off for two years now—to January 1, 2013. The bottom line is that TRA 2010 is temporary. In two years, it will disappear as though it had never existed.
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- The Downsizing Generation: How to Handle a Surplus of Stuff When a Loved One Ages - April 18, 2018
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