Here is a brief explanation of each tax:
Estate Tax: Tax assessed by the federal government upon a person’s transfer of property at death.
Gift Tax: A tax levied by the federal government upon the gratuitous transfer of property by an individual to another person during lifetime.
Generation-Skipping Transfer (GST) Tax: A tax assessed by the federal government on both outright gifts and transfers in trust to or for the benefit of individuals who are more than one generation younger than the donor such as grandchildren. The GST tax is intended to thwart those who seek to avoid imposition of an estate or gift tax at each generation level.
In 2010, Congress changed the estate/gift/GST tax for the 2010-2012 years only.
Here are a few highlights of the current law.
Until December 31, 2012, there is a $5,000,000 per-person exemption from the federal estate, gift, and generation-skipping taxes.
- Until December 31, 2012, the estate/gift/GST tax rate falls to 35%.
- Any exemption amount that goes unused by one spouse at his/her death may be available for use by the surviving spouse:
- However, portability can only be claimed on a timely-filed IRS Form 706 (including extensions) of the first spouse to die (even if no estate tax due!).
- Re-marriage may cut-off the right to use the deceased spouse’s unused exemption.
- Portability likely does not eliminate the need for A/B trusts or the need for re-titling of assets
- Portability does not apply to the GST.
- The unused exemption from a deceased spouse can be used by a surviving spouse for either lifetime gifts or testamentary transfers.
- The 2010 law does not adversely impact a taxpayer’s ability to claim valuation discounts for estate/gift/GST purposes.
- For existing A/B trusts with a tax-based asset division formula, most bypass trusts will likely be overfunded due to the $5 million exemption. If assets pass at death to the bypass trust:
- the trustee typically has discretion to benefit both surviving spouse and children;
- the marital trust may be empty, causing the surviving spouse to feel deprived and upset; and
- with no marital trust, at surviving spouse’s death, assets in the bypass trust will not get second basis step-up.
What if Congress fails to take further action by 12/31/12?
- The estate/gift/GST tax exemption amount will fall to $1,000,000 (thus, estate planning is likely permanently easier only for couples with a combined net worth of less than $1,000,000);
- The estate/gift/GST tax rate will rise to 55%; and
- Spousal portability may vanish (no one knows because the law is so poorly written).