Estate and Gift Tax Laws 2011

On December 17, 2010 Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (HR 4853).  This legislation dramatically changed the laws that would have come into effect on January 1, 2011; however, they only extend the existing legislation for two more years.  So although we have some certainty, it is only temporary.

Federal Estate and Gift Tax

These taxes are imposed to tax the transfer of wealth from one generation to the next.  Politics aside, many people wish to avoid this type of transfer tax.  As of December 2010, both the Estate Tax and the Gift Tax Exemptions increased, however, they became tied together so that every individual may transfer the exempt amount (now $5M) during his or her life or at death.  Transfers exceeding $5M will be taxed at a rate of 35%.  The new law also provides for “portability.”  Portability allows a surviving spouse to preserve a deceased spouse’s unused estate tax exemption by filing a federal estate tax return.  This preservation ensures that the couple may ultimately transfer a combined $10M before paying any transfer tax.

Minnesota Estate and Gift Tax

Minnesota does not have a Gift Tax, however, it does impose a state Estate Tax. The Minnesota Estate Tax Exemption is one million dollars ($1M), an amount substantially less than the federal exemption, with a rate of six to twenty-four percent (6-24%).  The smaller exemption in Minnesota means that more individuals must engage in tax planning.  It is unclear whether or not the portability law (or something similar) will be passed in Minnesota.  For that reason (among others) couples should continue to  incorporate tax planning concepts such as disclaimers into their estate plans.

[5/24/2013 UPDATE: On May 20, 2013, the Minnesota Legislature passed an Omnibus Tax Bill creating a state gift tax]

Resources

We have seen a surplus of great articles and newsletters reviewing the new tax laws.  Here are a few of our favorites that interpret or expand upon the estate and gift tax laws in effect for the next two years.

[Since publishing this article, Jamie Held of Epilawg has written “What is Portability?” which explains the portability piece of the  Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. *note added November 11, 2011]

In his monthly newsletter, Manish Bathia writes a comprehensive but easy to understand review of the new legislation.

For a scholarly review of the estate tax history and current law, read The Politics and the Policy of the Estate Tax – Past Present and Future by Michael J. Graetz – Professor of Law at Columbia University.