Lewis Saret, of the Forbes.com blog, posted a very informative article earlier in the week explaining the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which was signed into law at the end of 2010. Check out a snippet of his article below, or find the full text here.
Changes in Federal Estate Tax Exclusion Amount and Tax Rate
Before the Act, the federal estate tax was gradually reduced over several years and ultimately eliminated for decedents dying in 2010. Prior law provided that the estate tax, with a maximum tax rate of 55 percent and a $1 million applicable exclusion amount, would be reinstated after 2010. However, the Act reinstates the estate tax for decedents dying during 2010, but at a significantly lower maximum tax rate of 35 percent and at a significantly higher applicable exclusion amount of $5 million. Although this regime continues for decedents dying in 2011 and 2012, it is temporary and will sunset on December 31, 2012. At that point, the prior estate tax regime—with a 55 percent tax rate and $1 million exclusion—will be reinstated, subject to debate in Congress.
Changes in Carryover Basis Rules
The Act also eliminates the modified carryover basis rules for 2010 and replaces them with the stepped-up basis rules that had applied before 2010. Property with a stepped-up basis generally receives a basis equal to the property’s fair market value on the date of the decedent’s death. Under the modified carryover basis rules that applied during 2010 before the Act, executors could increase the basis of estate property only by a total of $1.3 million (plus an additional $3 million for assets passing to a surviving spouse, for a total increase of $4.3 million), with other estate property taking a carryover basis equal to the lesser of the decedent’s basis or the property’s fair market value on the decedent’s death.
The Act gives estates of decedents dying during 2010 the option to apply (1) the estate tax based on the new 35 percent top rate and $5 million applicable exclusion amount, with stepped-up basis, or (2) no estate tax and modified carryover basis rules under prior law.
The Act provides for “portability” between spouses of the estate tax applicable exclusion amount for decedents dying in 2011 and 2012, if both spouses die before 2013. Portability allows surviving spouses to elect to use the unused portion of the estate tax applicable exclusion amount of their predeceased spouses. This provides the surviving spouse with a larger exclusion amount.