Summary: New Transfer Tax Law

The President has signed into law the long-awaited legislation concerning transfer taxes. The new law is known as the Tax Relief, Unemployment Insurance Re-authorization and Job Creation Act of 2010 (the "Act"). Here is a brief summary of the changes made by the Act, all of which expire on December 31, 2012:

The Act establishes a $5M estate tax exemption, and a maximum estate tax rate of 35 percent, for decedents dying after January 1, 2010. For income tax purposes, the personal representative of a decedent who died during 2010 may elect to choose between 1.) a step-up in basis in decedent's property, or 2.) a carryover basis in decedent's property with no estate tax.

The Act establishes an increase in the gift tax exemption to $5M (with a gift tax rate of 35 percent), effective January 1, 2011. The gift tax annual exclusion amount will remain at $13,000; and the $1M exemption remains for gifts made in 2010.

The Act establishes a $5 million Generation-Skipping Transfer (GST) tax exemption (with a GST tax rate of 35 percent) for gifts made, and decedents dying, after January 1, 2010. Transfers made in 2010 will be subject to a zero GST tax rate, and gifts made in 2010 to grandchildren outright or in trust will incur no current GST tax. What's more, future distributions to grandchild from a trust created in 2010 can also be made free of GST tax. Distributions in 2010 from a non-exempt GST trust can still be made without incurring a GST tax.

Effective for decedents dying after January 1, 2011, the personal representative can elect to transfer any unused estate tax exemption to the surviving spouse.

The act extends lower individual income tax rates, including the 15% rate on long-term capital gains and qualified dividends, and provides AMT relief. Effective January 1, 2010, individuals older than 70½ may rollover up to $100,000 per year directly from an IRA to a public charity. These transfers will qualify as meeting the MRD for the year in which they are donated, and will not be included in the individual's gross income for federal income tax purposes. Also, any transfers made in January 2011 may be treated as made in 2010. The AMT relief and IRA charitable rollover provisions expire on December 31, 2011.