| Overview of estate, gift and generation-skipping transfer tax changes under the 2010 Tax Relief Act |
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Under the law in effect before the enactment of the 2010 Tax Relief Act, the estate tax was scheduled to be repealed in 2010, and then to return in 2011 with an exemption of $1 million and graduated rates reaching a top rate of 55% on transfers over $3 million. The 2010 Tax Relief Act reinstates the estate tax retroactively to the beginning of 2010, except where the executor of the estate of a decedent dying in 2010 makes an election (described below) to opt out of the estate tax and be subject to the modified carryover basis rules instead.
For estates of decedents dying after 2009, the 2010 Tax Relief Act provides that the estate tax exemption is $5 million (indexed for inflation after 2011) , and the tax is imposed at a flat rate of 35% on all transfers exceeding the exemption amount.
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| Qualified Personal Residence Trusts |
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A special kind of irrevocable trust can be used to transfer your residence to your children at a significantly reduced gift tax cost and with no estate tax, yet allow you to continue to live in the residence for as long as you wish. (You're probably aware that the estate tax has been repealed. However, the repeal is effective only for 2010. The estate tax is scheduled to return in 2011, and may even return before then if Congress reinstates the tax retroactively. ) This special type of trust is known as a qualified personal residence trust (QPRT). (QPRTs are sometimes also referred to as “residence GRITs” or “house GRITs”.) Here's how it works.
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| The Gift Tax Annual Exclusion |
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You may have inquired about the federal gift tax annual exclusion. As I illustrate below, taxpayers can transfer substantial amounts free of gift taxes to their children or other donees through the proper use of this exclusion. (You're probably aware that the estate tax has been repealed for 2010, but is scheduled to return in 2011. However, the gift tax has not been repealed, but continues to remain in effect in 2010 as well as in later years.)
The statutory exclusion amount ($10,000) is adjusted for inflation annually, using 1997 as the base year. The amount of the exclusion for 2010 is $13,000.
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Few people realize that, even though they may have a modest estate, their families may owe hundreds of thousands of dollars in estate taxes because they own a life insurance policy with a substantial death benefit. This is so because life insurance proceeds, while not subject to federal income tax, are considered part of your taxable estate and are subject to federal estate tax. (Even though the estate tax has been repealed, the repeal is effective only for 2010. The estate tax is scheduled to return in 2011, and may even return before then if Congress reinstates the tax retroactively.)
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| Qualified Personal Residence Trusts |
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A special kind of irrevocable trust can be used to transfer your residence to your children at a significantly reduced gift tax cost and with no estate tax, yet allow you to continue to live in the residence for as long as you wish. (You're probably aware that the estate tax has been repealed. However, the repeal is effective only for 2010. The estate tax is scheduled to return in 2011, and may even return before then if Congress reinstates the tax retroactively. ) This special type of trust is known as a qualified personal residence trust (QPRT). (QPRTs are sometimes also referred to as “residence GRITs” or “house GRITs”.) Here's how it works.
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