Before EGTRRA of 2001 was scheduled to sunset, Congress acted and President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRA"). TRA extended some of the provisions of EGTRRA and JGTRRA of 2003 and added some new provisions such as portability and indexing (both of which will be discussed in future posts on this blog).
Because TRA is the Act that is applied to all estates of people dying in 2010. However, because the passage was so late in the year, the personal representatives and trustees of those estates are given the option to choose to have provisions of EGTRRA and JGTRRA apply to the estate or to have TRA apply. Which option to choose will be decision based on whether in the long term, it is better to have the estate pass to the heirs and beneficiaries estate tax free or whether it is better to pay some tax but receiving the step up in basis. This is because in 2010 the estate tax was repealed but there was only a limited step up in basis available under EGTRRA. If TRA applies, the assets receive a step up in basis but the amount of the estate passing without estate tax is limited.
The limited of that tax is $5M per person ($10M per couple). This limit applies to the assets being transferred at death and those transferred during the lifetime of the donor as a gift. From 2001 through 2010, lifetime gifting without incurring a gift tax was limited to $1M per donor. But TRA unified gift, estate and generation-skipping transfer taxes to a lifetime limit of $5M. This presents a golden opportunity of wealthier Americans to make large lifetime gifts of appreciating property to members of the family circle. This circle may include children and grandchildren (and more remote decedents) because of this unification. Note, if in the future the estate tax is lower than $5M, any lifetime gifts made will come back into the estate of the decedent. Those gifts in excess of the estate tax imposed on the date of death will be subject to estate tax. If you make a $5M lifetime gift and the estate tax imposed is $3.5M, your estate will owe an estate tax on $1.5M. However, you have managed to make a tax free gift for federal and state purposes and frozen the value of the asset at the value at the time of gifting.
For a full summary of TRA 2010 click here.