Past and Present Estate and Gift Tax Laws

There is a federal gift tax imposed on lifetime transfers of property and a federal estate tax is imposed on transfers of property at death. An exception is made when the lifetime or death transfer is made to a qualified charity. There is another transfer tax that is imposed when the gift or devise is to a person in a generation that is more than one generation younger than the person making the transfer. This is called the generation skipping transfer tax. In 2009, the first $3.5 million was excluded from the estate and generation skipping tax and the first $1 million was excluded from the gift tax. The estate and generation skipping transfer tax was repealed by the previous Congress for persons dying during 2010. The gift, estate and generation skipping taxes have now been reinstated for persons giving or devising property in 2010, 2011 or 2012. The exclusion amount has been increased to $5 million. However, there is a special election that can retroactively be made to continue to exclude the estate of a person dying in 2010 from taxation. New federal legislation must be passed for the gifts or devises effective after 2012, or there will be a return to a $1 million estate and gift tax exclusion..

Portability of Unused Exemption Between Spouses

Under the new law, any applicable exclusion amount that remains unused as a result of the death of a spouse dying after December 31, 2010, can be applied to the estate tax owed on the subsequent transfer of property by the surviving spouse. If the surviving spouse remarries, the amount of the unused exclusion that is available for use by the surviving spouse is limited to the lesser of $5 million or the unused exclusion of the last deceased spouse. A surviving spouse may use the predeceased spousal carryover amount in addition to such surviving spouse’s own $5 million exclusion for taxable transfers. A deceased spouse’s unused exclusion amount is available to a surviving spouse only if an election is made on a timely filed estate tax return (including extensions) of the predeceased spouse, regardless of whether the estate of the predeceased spouse otherwise is required to file an estate tax return.

Basis in Property Received During Lifetime or at Death

A person must also pay a federal income tax on the amount realized from the sale of the inherited property less the taxpayer’s basis in this property. Basis generally represents a taxpayer’s investment in property and the cost of capital improvements made to the property less any depreciation deductions taken with respect to the property before it is sold. When a person receives a gift of property during the lifetime of the person making the gift, the donee (person receiving the property) acquires the donor’s basis. This is called the carryover basis. “Carryover basis” means that the basis in the hands of the donee is the same as it was in the hands of the donor. The basis of property transferred by lifetime gift also is increased, but not above fair market value, by any gift tax paid by the donor. The basis of a lifetime gift, however, generally cannot exceed the property’s fair market value on the date of the gift. If the basis of property is greater than the fair market value of the property on the date of the gift, then, for purposes of determining loss, the basis is the property’s fair market value on the date of the gift.

Basis in Property Received From a Decedent Who Died in 2009

Property passing from a decedent who died during 2009 took a “stepped-up” basis. The basis of property passing to a beneficiary from a decedent’s estate was the fair market value on the date of the decedent’s death. In the alternative, the personal representative (executor) of the estate of the person making the gift at death could elect an alternate valuation date that was the earlier of six months after the decedent’s death or the date the property is sold or distributed by the estate. This step up in basis generally eliminates the recognition of income on any appreciation of the property that occurred prior to the decedent’s death. If the value of property on the date of the decedent’s death was less than its adjusted basis, the property takes a stepped-down basis when it passes from a decedent’s estate.
Basis in Property Received From a Decedent Who Dies During 2010
The rules providing for a stepped-up basis in property acquired from a decedent were repealed for assets acquired from a person dying in 2010. However, the personal representative (executor) may increase the basis in assets owned by the decedent and acquired by the beneficiaries at death by increasing the basis of the assets transferred by up to a total of $1.3 million. In addition, the basis of property transferred to a surviving spouse may be increased by an additional $3 million. Thus, the basis of property transferred to a surviving spouse may be increased by up to $4.3 million.
Repeal of Modified Carryover Basis for Determining the Basis in Property Received from a Decedent who Dies after December 31, 2010
The modified carryover basis rules that were in effect for determining basis in property passing from a decedent who dies during 2010 do not apply for purposes of determining basis in property received from a decedent who dies after December 31, 2010. Instead, the step-up in basis law in effect prior to 2010, will apply.

Gift Tax Annual Exclusion

Donors of lifetime gifts are provided an annual exclusion in 2010, 2011 and 2012 of $13,000 on transfers of present interests in property to each donee during the taxable year. If the non-donor spouse consents to split the gift with the donor spouse, then the annual exclusion is $26,000 per donee for 2010, 2011 and 2012.
Transfers to a Surviving Spouse
A 100-percent marital deduction generally is permitted for estate and gift tax purposes for the value of property transferred between spouses if the donee spouse is a United States citizen. Transfers of “qualified terminable interest property” are eligible for the marital deduction. “Qualified terminable interest property” is property: (1) that passes from the decedent; (2) in which the surviving spouse has a “qualifying income interest for life”; and (3) to which an election applies. A “qualifying income interest for life” exists if: (1) the surviving spouse is entitled to all the income from the property (payable annually or at more frequent intervals) or has the right to use the property during the spouse’s life; and (2) no person has the power to appoint any part of the property to any person other than the surviving spouse.

Election for Decedents Who Die During 2010

If a person died in 2010, the Internal Revenue Code permits the personal representative to elect not to be subject to estate tax, and the basis of assets acquired from the decedent would be determined under the modified carryover basis rules. In the alternative, the executor may elect to have the 2011 laws apply.

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