What Lies Ahead for Estate and Gift Tax Provisions

When the 2010 Bush tax cut extension was passed into legislation, it also established a temporary federal estate and gift tax regime for 2011 and 2012. But if Congress and the president fail to take action, the tax cuts will resort back to their unpopular days starting January 1, 2013. To help gain a better understanding of what this means for taxpayers, here is a quick overview of the current rules:

$5.12 Million Exemption and Flat 35% Tax Rate

Currently, the federal estate tax exemption for estates of individuals who die in 2012 is $5.12 million. The lifetime federal gift tax emption is also $5.12 million, up from $5 million in 2011. Additionally, the gift tax rate of the taxable value of an estate in excess of the exemption is a flat 35%.

Deceased Spouse’s Unused Exemption Is Portable

For an individual who dies in 2011 or 2012, the unified federal estate and gift tax is portable, which means the unused portion of the exemption of the deceased spouse can be passed along to the surviving spouse.  The election to pass the unused exemption to the surviving spouse must be made on a timely filed Form 706 (even though no estate tax is due).

Unlimited Basis Step-Up for Inherited Assets

Heirs of individuals who die after 2010 won’t owe any federal capital gains taxes on asset appreciation that occurs through the date of death, assuming the date is after 2010.

Unfortunately, when 2013 rolls around we will automatically go back to the tax rules that were in effect before the Bush tax cuts were enacted. This means $1 million unified estate and gift tax exemption versus $5.12 million under current rules, and a maximum estate and gift tax rate of 55%, versus 35% under the current rules. However, we won’t know the final verdict of the 2013 gift and estate tax situation until after the November election.

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