Extension of Sunset Period
TRA 2010 is not a completely new law as much as an extension and revision of EGTRRA. TRA 2010 extends the sunset of EGTRRA for two years by replacing “December 31, 2010” with “December 31, 2012.” The provisions of EGTRRA that were set to expire at the end of 2010 will now expire at the end of 2012. But like EGTRRA, the new Act has a sunset provision. Unless Congress acts prior to December 31, 2012, both EGTRRA and TRA 2010 will disappear, leaving a $1 million applicable exclusion amount and tax rates of up to 55 percent. Congress is back in the position of having to come to a (hopefully) permanent solution before TRA 2010 sunsets.
Reinstatement of the Estate Tax and Repeal of Carryover Basis
TRA 2010 reinstates the estate tax and repeals carryover basis for decedents who die after December 31, 2009. This means that TRA 2010 applies retroactively to 2010 estates. Under the default rules, the estates of decedents who die in 2010 will be subject to estate tax, but will also be entitled to a full basis step-up.
Retroactivity of a new estate tax law had been discussed for more than a year. Many felt that retroactivity would not withstand a constitutional challenge. TRA 2010 avoids this issue by including an exception to its retroactive application. Executors can choose to apply EGTRRA to the estates of decedents who die in 2010. This allows executors to elect out of the estate tax, but at the cost of losing stepped-up basis.
The election to apply prior law puts more responsibility on executors, which must now decide which regime is most favorable. If the prior law would be more favorable to the estate, the executor can elect for EGTRRA to apply. Otherwise, TRA 2010 will apply. The Secretary of the Treasury is responsible for determining the time and manner in which the election will be made.
Planning Note: Choosing which Regime to Apply
As mentioned, we now have a choice between two alternatives for individuals who die in 2010: (a) an estate tax with a $5 million applicable exclusion amount and a 35 percent tax rate, but with a full step-up in basis (under TRA 2010); or (b) no estate tax and the modified carryover basis system of prior law (under EGTRRA). This choice will raise issues (and give rise to liability) for tax preparers and others involved with administering estates.
In most cases, TRA 2010 will be more favorable for decedents who die in 2010 with non-taxable estates (estates worth less than $5 million, after deductions). No estate taxes would be owed under TRA 2010, and the decedent’s full-basis step up will be preserved. This result will be a win-win for most taxpayers.
The lines will be more difficult to draw for 2010 decedents with estates in excess of $5 million. Here, there will be no easy solution other than to run the numbers and compare the potential estate tax liability with the deferred income tax cost.
New Tax Rates and Unified Applicable Exclusion Amount
In 2011, the exclusion amount will be truly unified, meaning that the exclusion amount is the same for estate, gift, and GST taxes. And the exclusion amount is higher than it has ever been—$5 million. This means that, in 2011 and 2012, individuals can transfer up to $5 million in assets to the next generation free of estate tax, regardless of whether the transfer occurs during lifetime or at death. Transfers in excess of $5 million will be taxed at the relatively low tax rate of 35 percent.
Since the reunification of the gift and estate tax did not occur until 2011, TRA 2010 did not affect the treatment of gifts that were made in 2010. For gifts made in 2010, the applicable exclusion amount is $1 million and the gift tax rate is 35 percent. But even if the full $1 million exclusion amount for gifts was used in 2010, taxpayers will have an additional $4 million available in 2011.
The $5 million exclusion amount is indexed for inflation in $10,000 increments beginning in 2012. Since TRA 2010 is currently scheduled to sunset at the end of 2012, this provision would make little sense unless the legislators anticipated an extension of TRA 2010 beyond 2012.
Extension of Filing Deadlines
TRA 2010 extends filing deadlines for certain transfer tax returns, presumably to give tax preparers the time to adjust to these changes. Decedents who die after December 31, 2009, but before December 17, 2010, have nine months from the date of enactment to: (1) file any estate tax return required by Code § 6018; (2) pay taxes due under Chapter 11; and (3) make any available disclaimers under Code § 2518(b). Since TRA 2010 was enacted on December 17, 2010, this extension will push the dates to Saturday, September 17, 2011, adjusted for the weekend.
About Jeramie Fortenberry