Congress passed and President Obama has signed into law the deal extending the Bush tax cuts that he struck with Congressional Republicans. The legislation restores the estate tax for two years at a 35 percent tax rate, with estates up to $5 million exempt from paying any tax ($10 million for couples). If Congress does not change the law in the interim, in 2013 the estate tax will revert to what it was scheduled to be in 2011 — a 55 percent rate and a $1 million exemption.
The new $5 million estate tax exemption and 35 percent rate are retroactive to January 1, 2010. The heirs of those dying in 2010 will have a choice between applying the new rules or electing to be covered under the rules that have applied in 2010 — no estate tax but only a limited step-up in the cost basis of inherited assets. This will benefit the heirs of tens of thousands who died in 2010 with relatively modest estates and who would have been subject to capital gains tax on inherited assets above a certain threshold.
The law makes the estate tax exemption “portable” between spouses. This means that if the first spouse to die does not use all of his or her $5 million exemption, the estate of the surviving spouse could use it.
The law unifies the estate, gift and generation-skipping transfer tax exemptions at $5 million. (For 2010 there is no generation-skipping tax, while the gift tax exemption has been $1 million for a number of years.) A 35 percent tax rate will apply to gifts or transfers over the $5 million threshold. (There is no change in the $13,000 annual exclusion amount for gifts.)