12.19.2010 Happy Holidays: Historic Wealth Transfer Tax Changes

The Holiday Season brought an extra special gift to our clients – historic (and quite generous) wealth transfer tax relief. Today, President Obama signed the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (the “Tax Relief Act”) which broadly extends the so-called “Bush Tax Cuts” – the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) – for two years. The Tax Relief Act amends the “sunset” provisions of EGTRRA, changing the sunset date from December 31, 2010 to December 31, 2012. As a consequence, most EGTRRA provisions are extended through 2012, including many helpful technical corrections.

The provisions related to the Estate, Gift, and Generation Skipping Transfer (GST) Tax contain some of the most significant and generous changes. The following chart summarizes the wealth transfer tax provisions from 2009-2013. 

Estate and Gift Taxation in 2010

You may recall that, under EGTRRA, the estate tax was repealed as of January 1, 2010. Under the Tax Relief Act, the estate tax is reinstated retroactively to January 1, 2010 with a $5.0 million exemption at a 35% tax rate. The application of the estate tax also includes a full basis adjustment, or step-up, at death. In 2009, the exemption amount was $3.5 million and the tax rate was 45%. The gift tax exemption remains at $1,000,000 in 2010, also with a 35% rate.

The Tax Relief Act contains a special rule for individuals who die in 2010. The executor of the estate of a 2010 decedent may elect out of the estate tax. Of course, the estate will forgo the full basis adjustment at death. Instead, the executor will have $1.3 million of additional basis to allocate to assets included in the estate (and an additional $3.0 million of basis for transfers to a surviving spouse or a trust for the benefit of a surviving spouse).

For decedents dying in 2010, an executor of an estate in excess of $5 million will need to determine whether filing an estate tax return or electing under the carryover basis rules is preferable. An executor would want to consider a variety of factors, including: (i) the estimated amount of estate tax payable, (ii) the capital gain that would occur on a future sale of assets with and without basis step up, (iii) the timing of future sales, and (iv) the anticipated future capital and ordinary income tax rates.

Extension of Time for Filings, Elections, and Payments

Due to the significant change in estate tax rules this late in the year, the Tax Relief Act extends the time for individuals and executors to make certain tax filings, elections, and payments. The Tax Relief Act extends the due date for the filing of estate tax returns and the payment of estate tax to nine months after the date of enactment of the statute.

Under EGTRRA, executors were required to file the carryover basis report (for estates electing out of the estate tax) with the decedent’s final income tax return. The Tax Relief Act extends the due date for filing this report to nine months after the date of enactment.

The Tax Relief Act also extends the time for making a disclaimer of property passing by reason of the death of a decedent who died in 2010 (but prior to enactment of the Tax Relief Act) to nine months after the date of enactment. Therefore, a “qualified” disclaimer under this section could occur significantly later than nine months after the date of death. Despite this, the disclaimer must still comply with the other qualified disclaimer rules (irrevocable, no acceptance of benefits, etc.) and any additional state law requirements.

Estate and Gift Taxation in 2011 and 2012

For decedents who die in 2011 or 2012, the estate tax exemption is $5.0 million with an estate tax rate of 35%. In 2012 the $5 million exemption is indexed for inflation from 2010 (rounded to the closest $10,000). Significantly, beginning in 2011, the gift tax exemption is reunified with the estate tax exemption at $5.0 million, indexed for inflation beginning in 2012.

The reunification of the estate and gift tax exemptions creates an enormous opportunity to make tax-free gifts of appreciating assets during one’s lifetime. Most notably, clients who already have consumed their $1 million lifetime gift tax exemption now have an additional $4 million of gift tax exemption with which they can make additional gifts.


A new provision, intended to provide simplicity, relates to portability of the estate tax exemption from a deceased spouse to his or her surviving spouse. The executor of a deceased spouse’s estate may transfer any unused estate tax exemption to the surviving spouse. Absent this provision, the first spouse was required to create a “credit-shelter” trust that was designed to shelter the first spouse’s exemption amount from estate taxation at the death of the second spouse. Under the Tax Relief Act, the first spouse can simply transfer his or her exemption amount to the surviving spouse. In the case of multiple marriages, only the most recent deceased spouse’s unused exemption may be used by the surviving spouse. In addition, there must be “privity” among spouses – that is, you must be married to the person to use his or her exemption amount.

Example. Assume that H1 and W1 are married. H1 dies and transfers his $5.0 million exemption to W1. W1 remarries H2, and then W1 dies. W1 can transfer her $5.0 million exemption to H2, but she cannot transfer H1’s 5.0 million exemption to H2, because there was no privity or marriage between H1 and H2.

While the portability provision has some appeal, it has many more issues and problems. First, even though the estate tax exemption is portable, the GST exemption is not. Therefore, clients seeking to create long-term trusts for the benefit of their children and more remote descendants cannot take advantage of portability because the first spouse’s GST exemption cannot be transferred to the second spouse.

Second, the portable estate tax exemption is not indexed for inflation. As a result, if the assets transferred to the surviving spouse appreciate, the appreciation will be subject to estate taxation at the surviving spouse’s death.


Example. Husband dies and leaves $5 million of assets to Wife, along with his $5 million exemption. The assets appreciate at 6% per year for the next 10 years until Wife’s death. At that point, the $5 million of assets are now worth nearly $9 million dollars. The $5 million exemption received from Husband does not cover the full value of these assets, and Wife’s estate could pay an additional $1.4 million in estate tax (at a 35% rate). If, on the other hand, the assets passed into a “credit-shelter trust” at Husband’s death, the full $9 million would escape estate taxation at Wife’s death.

Third, from a non-tax perspective, assets passing directly to an individual are subject to the claims of creditors. Assets passing into a trust are generally exempt from the claims of creditors (tort or contract claims) or the claims of ex-spouses in a divorce context. For this reason, we see great utility in the continued use of trusts.

Fourth, in order to take advantage of the portability provisions, the executor must make an election on a timely filed estate tax return. Such an election, once made, is irrevocable. Because there is no statute of limitations for purposes of the IRS’s review of the first return, estates with difficult to value assets, such as closely held business interests or real estate, will not be able to achieve finality with respect to the valuation of such assets until the death of the second spouse.

Finally, given the potential repeal of the Tax Relief Act at the end of 2012, we are reluctant to recommend extensive reliance on a portability provision that may, in fact, exist for only two years.

Portability Gift Tax Loophole

As discussed above, in the case of multiple marriages, the surviving spouse may only use the unused exemption of the most recently deceased spouse. Interestingly, the statute itself has no limits on the surviving spouse’s ability to take advantage of exemptions from multiple deceased spouses for gift tax purposes.



Example. H1 dies with substantial unused exclusion and leaves such amount to W1. W1 could make lifetime gifts using her own exclusion and H1’s unused exclusion. If W1 remarries, and H2 then predeceases her with unused exclusion, W1 could make additional gifts using H2’s unused exclusion. In this example, W1 could make up to $15 million of lifetime gifts.

GST Tax in 2010-2012

You may recall that in 2010, the GST Tax was repealed. The Tax Relief Act reinstates the GST tax in 2010 with a $5.0 million exemption, but sets the tax rate at 0%. The GST exemption for 2011 will also be $5.0 million. Beginning in 2012, the $5.0 million amount is indexed for inflation (measured from 2010). Because the maximum estate tax rate in 2011 and 2012 is 35%, the GST rate for those years is also 35%.

Because the GST Tax rate for 2010 is 0%, taxable distributions or taxable terminations to skip-persons in 2010 may be made without incurring GST tax. Despite the tax benefits to this approach, a fiduciary must still ensure that an early termination is consistent with the purposes of the trusts. Depending on the trust terms, size of the trust, and other factors, a termination may require court approval, which is unlikely to occur before the end of 2010.

What Was Not Included in the Tax Relief Act?

The legislative proposals that were not included in the Tax Relief Act are also significant. Most importantly (and of greatest interest and concern to our clients) is the omission of the proposal that would have a required a 10-year minimum term of Grantor Retained Annuity Trusts (or GRATs). This provision was included in the Obama administration’s legislative proposal and several subsequent bills that were passed by either the House or the Senate (but fortunately, never both). This provision would have greatly dampened the utility and appeal of GRATs. In addition, several legislative proposals were advanced that would have curtailed the use of valuation discounts in determining the value of interests in closely held businesses, including family limited partnerships or LLCs. The Tax Relief Act does not include any of these proposals.

Year-End Gift and GST Tax Planning Opportunities

Many of our clients were considering the possibility of making taxable gifts at the end of 2010 to lock in the lower 35% tax rate. Now, with a 35% tax rate in place and a $5 million gift tax exemption in 2011, many clients are deferring those gifts until 2011. The one exception is for clients who wish to make a very large gift to grandchildren in 2010 and avoid the application of the GST tax to those gifts by taking advantage of the 0% GST tax rate this year.

Leverage Gifts and Loans Using Lower Interest Rates

Currently, the low interest rate environment makes leveraged gifts and low interest loans quite attractive. The Section 7520 rate used for determining the tax consequences of Grantor Retained Annuity Trusts (GRATs) and Charitable Lead Annuity Trusts (CLATs) are at an all-time low of 1.8%. As a consequence, now is an excellent time to consider these planning vehicles.

In addition, the interest rate for loans to family members is also quite low. In December 2010, the applicable federal rate for loans with a term of less than three years is 0.32%. For loans between three and nine years, the applicable federal rate is 1.53%. And for loans over nine years, the interest rate is 3.53%.


Congress delivered an early holiday present this year by providing many of our clients with numerous planning opportunities over the next two years. Please feel free to contact any member of the Williams Mullen Private Client and Fiduciary Services Team with questions on the Tax Relief Act.

Happy Holidays and Best Wishes for the New Year! 

For more information about this topic, please contact the authors or any member of the Williams Mullen Private Client & Fiduciary Services Team.



Please note:
This newsletter contains general, condensed summaries of actual legal matters, statutes and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel. For more information, please visit our website at or contact John H. Turner, III, 804.420.6480 or For mailing list inquiries or to be removed from this mailing list, please contact Margaux Sprinkel at or 804.420.6315.