On December 17, 2010 President Obama signed H.R. 4853, the Tax Relief, Unemployment
Insurance Reauthorization and Job Creation Act of 2010. The most sweeping tax legislation
to be enacted in nearly a decade significantly alters the gift and estate taxes.
One of the most extraordinary aspects of the new law is a provision that allows
an individual to give away $5 million during the individual's lifetime completely
free of federal gift tax. To understand the momentousness of this exemption amount,
consider that from the time the gift tax was first introduced in 1924 until now,
the most a person could give away during life without owing federal gift tax was
$1 million. The Tax Relief Act of 2010 is set to expire at the end of 2012,
meaning that the extremely wealthy have been granted a two-year window of opportunity
to pass unprecedented amounts of wealth to children, grandchildren, and others completely
gift tax-free.
Certain types of gifts, such as gifts to spouses and to charities, and gifts within
annual allowances set by law are always exempt from the gift tax. The $5 million
exemption is an allowance available to exempt gifts that don't fall within these
always-exempt categories. In 2012 the $5 million amount may be adjusted to include
a cost-of-living increase.
The $5 million exemption provided for in the Tax Relief Act of 2010 is a unified
gift and estate tax exemption amount, meaning that the exemption may be used at
death to the extent it is not as used during
life. For example, if a person who dies while the Act is in effect made gifts of
$2 million during life, then $3 million of the person’s exemption amount would remain
at death, allowing $3 million to pass to the decedent's beneficiaries free of federal
estate tax.
A dramatic new provision of the Tax Act helps married couples fully utilize both
of their $5 million exemptions. If a married person dies during 2011 or 2012, any
portion of the spouse's $5 million exemption that is not used to reduce his or her
taxable estate may be used by the surviving spouse to reduce the surviving spouse's
taxable estate. In the past, any portion of the estate tax exemption amount that
was unused by the estate of the first spouse to die was simply lost and was not
available to the surviving spouse.
The Tax Relief Act expires at the end of 2012 when Congress will once again be called
upon to devise a more permanent gift and estate tax system. Because of the various,
constantly changing political and economic ingredients that impact congressional
decision-making, it is impossible to say at this point what the gift and estate
tax system will look like in 2013 and beyond.
