The new federal estate and gift tax laws (briefly summarized in this posting) do not impact many of the laws on the books in California about probate. It may be easy to think that because Congress will allow each one of us to pass up to $5 million estate tax free that we don’t need a living trust since there might not be any tax benefits to having a trust. It is IMPORTANT TO KNOW that passing ownership of property to an heir or beneficiary may still require going through probate since the law passed by Congress does not avoid probate. Estate taxes and probate are unrelated since one involves federal rules while the other involves state rules. To avoid probate, Californians should use a living trust even if the estate is under $5 million in value and the trust provides no tax benefits.
Maximum Estate Tax Rate
The estate tax rate is lowered to 35% for deaths in 2011 and 2012, and for 2010 deaths where the estate tax regime is elected.
Unused Estate Tax Exemption “Portable” to Surviving Spouse
For 2011 and 2012 deaths, unused estate tax exemption of the first spouse to die can be transferred to the surviving spouse and added to his or her own exemption. There are limitations on receiving exemption from more than one predeceased spouse, however.
Sunset in 2013
Beginning in 2013, everything goes back to the 2001 rules, so the estate tax exemption will be $1 million, with a 55% rate; the gift tax exemption will be $1 million with a maximum 55% rate for gifts above $1 million; and the GST exemption will be $1 million (adjusted for inflation from 1997).
Estate Tax Exclusion Increased for 2011 and 2012 Deaths
The estate tax exemption amount will be $5 million for deaths in 2011, and $5 million indexed for inflation in 2012. For deaths in 2013 and later, however, the sunset causes the 2001 estate tax exemption ($1 million) to come back.
Estate and Generation-Skipping Transfer Tax Reinstated for 2010 Deaths, With Election
For 2010 deaths, an election may be made between either (a) paying estate tax with a $5 million exemption and 35% maximum rate and receiving a stepped-up income tax basis or (b) paying no estate tax but receiving carryover basis, subject to certain modifications. The estate is deemed to choose option (a) unless affirmatively electing option (b). Method and deadline for electing have yet to be determined.
Gift Tax Rate and Exclusion Remain As-Is for 2010 Gifts, but Increase for Later Years
For 2010 gifts, the lifetime gift tax exemption will remain $1 million and the rate for gifts above $1 million will remain 35%. For gifts in 2011 and 2012, however, the lifetime gift tax exemption will increase to $5 million (indexed for inflation in 2012); the rate for gifts above $5 million will remain 35%. The sunset causes gifts in 2013 and later, however, to be subject to a lifetime gift tax exemption of $1 million and a maximum rate of 55% for gifts above $1 million.
GST Exemption Increased and Rate Decreased
For gifts and deaths in 2010 through 2012, the GST Exemption is $5 million (indexed for inflation in 2012). GST Exemption may be allocated for 2010 deaths even if the “no estate tax” option is elected. The GST Tax rate is 35% for 2011 and 2012.
No GST Tax Payable in 2010
For gifts and deaths in 2010 only, the Generation-Skipping Transfer (GST) Tax rate is 0%, so no GST tax will be payable with respect to such transfers. This could present significant 2010 year-end planning opportunities for a small number of individuals.
Certain Filing Deadlines Extended
For deaths from January 1, 2010, through December 16, 2010, deadlines for filing estate and GST tax returns, paying estate tax, and making disclaimers are extended until the later of September 17, 2011 (9 months from the date of enactment), and the regular due date.