Ok, so it's been a little while. But, if you haven't noticed, there has been a lot going on lately, and the life of a tax lawyer this time of year can be a little busy.
For those of you living under a rock, there is a new tax bill that has been passed by the Senate and is scheduled to be voted on by the House today. There are lots of provisions, but I will focus on the transfer tax portions of the trust.
Under the new tax law -
1. Everyone will be entitled to a $5,000,000 exemption from the estate tax. This exemption will be "unified", which means that an individual can give away a combination of $5,000,000 during life or at death before paying any estate tax. In 2009, a person could give away $3,500,000 at death, but only $1,000,000 during life.
2. The rate of tax for any transfers in excess of $5,000,000 is $35%. This is down from 45% in 2009.
3. The estate tax exemption is "portable." This means that if a person dies and does not use his or her entire $5,000,000 exemption, his or her spouse can use the unused portion. Under prior law, it was possible to use both spouses exemptions, but it required relatively sophisticated planning.
4. For an individual who died (or will die) in 2010, his or her estate has the option of no estate tax and a carryover basis, or an estate tax as outlined above and a stepped-up basis.
So, what does this mean for us in TN? I think the two most important issues to consider for people in TN are the increased gift tax exemption and the portability of estate tax exemption.
1. With a new $5,000,000 exemption from the gift tax, an individual could on Jan. 1, 2011 make a $5,000,000 gift and pay no federal estate tax. This is a great result. We must not forget, though, that TN has its own gift tax, and there is no exemption from the TN gift tax. This means that a $5,000,000 gift would generate $463,400 of tax. This is a pretty big pill to swallow, and most taxpayers will not want to pay this tax.
2. Although the estate tax exemption will be portable, the $1,000,000 exemption from the TN inheritance tax is not portable. Accordingly, in order to take advantage of both spouses' exemptions, it will still be necessary to create a bypass trust at the first death.
While the new tax act appears to be a great deal for the wealthy, it also creates some very interesting issues for people dying in TN.
