The 2010 Tax Act & Estate Planning

By Stuart G. Schmidt, Esq.

After years of trying to predict what Congress would do with the estate tax laws, we finally have the answer. Each individual can now transfer up to $5 million, during life or at death, free of any Federal estate tax. However, this law is only effective for 2 years at which time it will be subject to debate and possible compromise. This law, which is part of the Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 Tax Act”), was enacted in the last few weeks of December 2010. Although a number of tax issues were addressed by the 2010 Tax Act, its effect on estate planning is monumental.

The Federal estate tax is part of unified transfer tax system where the Federal government imposes taxes on transfers of wealth. The unified system is comprised of three parts: an estate tax, a gift tax, and a generation-skipping tax. An estate tax is paid on the fair market value of what a person owned at death. Transfers of wealth between living persons are subject to the gift tax. Transfers to grandchildren or more distant descendants, whether at death or during life, are subject to the generation-skipping transfer tax.

Before a transfer tax is assessed, the Federal government allows individuals to transfer a certain amount of wealth. This amount is commonly referred to as the “unified credit” or the “exemption amount”. Any property above this exemption amount has historically been taxed at around 50%. Prior to the Bush-era tax cuts, which were enacted in 2001, the exemption amount that each individual had could be used to shelter transfers of property during life or at death. In other words, the exemption amount for gifts and transfers at death was the same. However, in 2001 when the Bush-era tax cuts were enacted, this changed. The gift tax exemption was set at only $1 million. However, the estate tax exemption, which can be used to shelter transfers of property at death, was set to increase each year until 2010 when the estate tax was repealed altogether. There was one catch; the only way an individual could benefit from the Bush-era estate and gift tax cuts was to actually die during this period. This was not a very attractive planning option.

What is most notable about the 2010 Tax Act is that the new $5 million exemption amount can be used for gifts and transfers during life. To some extent this is surprising because although the law only lasts for two years, during this two-year period people can get the full benefit of the new $5 million exemption. Unlike the Bush-era tax cuts, you don’t have to die to get the benefit; however, you do have to plan and be willing to make substantial gifts. Another important aspect of the 2010 Tax Act is the rate of tax. After the $5 million exemption amount is used, the tax rate is 35%, a substantial decrease from the prior top rate of over 50%. Again, these changes only last for 2 years.

When the law expires December 31, 2012, the exemption amount for gifts and transfers at death will come back down to $1 million and the tax rate will be increased to 55%. Although it is likely this exemption amount will be increased through new legislation, there is no guarantee of this. Further, any such increase would not likely be as high as the current $5 million exemption amount. Thus, the 2010 Tax Act provides a great opportunity for estate planning. The next two years is an important time to consider the various types of gifting strategies that are available.

Many of the other gift tax exemptions that people are familiar with still apply. An individual can still give $13,000 (or $26,000 for a married couple) annually to each child, to each grandchild, or to any other person. Using this annual exemption does not impact your lifetime exemption amount. Healthcare and tuition expenses for children, grandchildren and others can continue to be paid directly without any tax or reducing one’s life time exemption amount or the annual $13,000 exemption amount.

If you don’t have any estate planning in place then your plan should start with the fundamentals, which usually consist of a revocable living trust, a power of attorney for property, a health care directive, nominations of guardians for minor children and a pour over will. Keep in mind that although avoiding taxes is an important goal of estate planning, the following goals need to be addressed as well:
  • Making sure your children develop a sense of values, ethics, and a desire to be productive members of society.
  • If you own or control a business, providing for a smooth transition of management into the hands of persons who will effectively manage the business.
  • Arranging your affairs to minimize the chance for disputes among your heirs.
  • Making sure that your heirs can live with the estate plan. A plan that is too rigid and cannot respond to changes in the economy, or to unanticipated events, can burden the family.
  • For individuals with charitable wishes, making sure that your vision will be fulfilled.

Although the 2010 Tax Act is not a law change that will require everyone to modify their estate plan, it does add one more reason to have your estate plan reviewed. In general, your estate plan should be reviewed every 3 to 5 years, when there is a law change or when there is a major life change such as:
  • Change of mind as to who should control your estate on death.
  • Change of mind as to how assets should be distributed (i.e. trust to protect a newly married child or a spendthrift child).
  • Change in family composition (new beneficiary or loss of a beneficiary).
  • Increase in personal wealth or increase in amount of life insurance.
  • Change in your relationship with an executor, guardian, or trustee.
  • New assets or business, which are not “covered” by the existing plan.

It is time to review your estate plan. If you don’t yet have an estate plan, it’s time to get it done. Your death or incapacity will be emotionally traumatic for your family; don’t make it legally difficult as well. Contact one of our estate planning attorneys, Stuart G. Schmidt or David J. Lee, to assist in the creation, review and/or update of your estate plan. Our job as your attorneys is to make this process easy and painless and, most importantly, put a proper plan in place. Call us today at (408) 356-3000 or send us an email at


Contact Form




Captcha Image