Estate and Gift Tax Bill Clears Congress, Signed by President

On December 16, 2010, the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” was passed by the Senate and House, and the President signed the bill on December 17. There are a lot of provisions dealing with income taxes which I won’t be mentioning. Instead, this column focuses on the new estate and gift tax provisions.

The federal estate tax sections in the new law include the following features:

The basic exemption from estate tax will be $5 million per person, and $10 million for a married couple. For any assets beyond the basic exemption amount, the top estate tax rate will be 35%.

Unlike the previous law (under which the exemption was individual), the new law will give a surviving spouse the full $10 million double exemption – but only if, when the first spouse dies (in 2011 or 2012) an estate tax return is filed, and on that return the Executor informs the IRS that any unused portion of the basic exemption will be carried over to the estate of the surviving spouse.

This law leaves a big unanswered question: if Spouse #1 dies in 2012 while this new law is in effect and the Executor claims the carry-over exemption, but Spouse #2 dies later (in 2013 or after) when this law is no longer effective, will the double exemption still be available to the second-to-die? No answer is provided in the new law, which points to its biggest flaw: it is only legally valid for a short time period.