The Temporary Federal Estate Tax Law and You
February 28, 2011
The Law Offices of Julia Wald


Mid-August 2010, the San Francisco Giants found themselves at a crossroads: stay the course and suffer another disappointing season or act quickly and hope for the best. With the season about to end and few options remaining, the Giants boldly chose to act.


The last minute acquisition of great players and the line-up changes dramatically improved the team. These "quick fixes" not only yielded a Division Pennant but also led to a World Series title. Though the improbable yet successful 2010 season will live forever in Giants' lore, the lack of a clear plan for sustaining such success leaves the future uncertain.


Like the 2010 Giants, the current federal estate tax laws have a successful short term life but an uncertain future. In late December 2010, Congress found themselves at a crossroads with time rapidly evaporating and options limited. Were Congress to do nothing in 2010, 2011 would bring a reduced estate tax exemption of $1 million per person and a 55% estate tax rate on all assets in excess of the $1 million exemption amount. Alternatively, if, perchance Congress could act, it might create better estate tax laws.


Like to the Giants, Congress chose to act.  As a team of Republicans and Democrats, it enacted temporary estate tax laws on December 16, 2010 (for 2011 and 2012) as a "quick fix". As with the Giants, the permanent "fix" has yet to be created.

The Law Offices of Julia Wald
Estate Tax Law for 2011 and 2012
One-Time Wonders or a More Permanent Legacy?The current estate tax laws apply only to the estates of persons passing away between January 1, 2011 and December 31, 2012. (Note that the estates of people dying in 2010 can be brought under the new law under certain circumstances.) In 2011 and 2012 a decedent is allowed to pass $5 million worth of assets to whomever he or she wishes free of federal estate tax. With proper estate planning, married couples can transfer up to $10 million free of estate tax. Assets in excess of the $5 million exemption for individuals and $10 million for married couples will be taxed at a maximum rate of 35%.

The temporary federal estate tax law provides an additional advantage to married couples by allowing the surviving spouse to take advantage of the deceased spouse's unused exemption amount. This is referred to as "Portability". (These laws only apply to heterosexual couples that are legally married. Thus, at this time, these rules do not apply to domestic partners or people in same-sex marriages.)

With a so called "portable exemption amount", if the entire $5 million exemption amount is not used in the estate of the first to die spouse, the unused portion can be used to shelter assets in the estate of the surviving spouse. This portability allows married couples to transfer up to $10 million in assets free of estate tax even if the first to die does not use the Federal exemption amount. As usual estate planning with a competent lawyer and trust administration after each death, again with a competent lawyer, is often necessary in order to take full advantage of the federal estate tax temporary law.


The Law Offices of Julia Wald
Federal Gift Tax Law 
Under the temporary law, lifetime gifts of up to $5 million can be made free of Federal estate tax.


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Example of Estate Tax Exemption and Portability Application

A giant celebrationHusband and wife have $6 million in community property in 2011. These assets have been placed in their revocable Trust. Neither of them has any other assets.

Husband passes away this same year.

The couple's trust allows for the community property to be split as follows:

The survivor's one-half to a revocable trust.

The deceased spouse's one-half to an irrevocable trust for the survivor's and the children's benefit. This trust qualifies as an exemption trust; federal estate taxes do not have to be paid on it as it is protected from tax by a portion of the deceased spouse's federal estate tax exemption.

The two trusts are funded with $3 million each. The wife files the necessary federal estate tax return for her husband's estate so that the husband's $5 million in exemption is split, $3 million applying to the irrevocable trust and the remaining $2 million of unused estate tax exemption saved to use later;

In 2012 the wife dies; the irrevocable trust is worth $4 million and the wife's trust is worth $7 million.

The wife's estate has an individual federal estate tax exemption of $5 million plus it has the $2 million of the husband's unused estate tax exemption (which is portable) for a total of $7 million in estate tax exemption. Therefore, the wife can pass the entire $7 million in the wife's trust free of estate tax.


The Law Offices of Julia Wald

Cost Basis Rules for 2011 through 2012

Celebration along Market StreetFederal estate tax law intersects with income tax law. One important intersection is basis rules. In simplest terms, your basis in property is the price you paid for it. Before 2010 the law was that at death your property's basis became its value at date of death. The law in 2010 (and only in 2010) said that the step up in basis was limited in amount. The temporary estate tax laws passed in late 2010 got rid of all restrictions on the step up of basis.

The current law is particularly advantageous for community property owned by heterosexual married couples. This means that at the first spouse's passing, all of the community property and the deceased spouse's separate property receive a basis adjustment to the value of these assets at the date of the deceased spouse's death (or a later date in some cases).

Remember that community property is described by law as owned half by the husband and half by the wife. If the wife dies, it is logical that there would be a basis adjustment for her half of the property; it is not particularly logical that the husband's half of the community property would also get a basis adjustment, but it does. Then, at the husband's passing, all assets owned by the husband will receive a basis adjustment to their values at the time of his death.

Why does the basis adjustment matter? When a capital asset is sold, the capital gain or loss on the sale is calculated as the difference between the basis and the sales price. At a time when capital assets appreciated with regularity, this meant that a house bought in the '60's for a small amount and held as community property until the death of one of the spouses, then sold shortly thereafter, created no capital gain liability for the surviving spouse.

The low basis magically increased on both the deceased spouse's half and the survivor's half so that the difference between the sales price and the basis could be at or nearly at ZERO. We hope to return to days of increasing values so we can take maximum advantage of a step up in basis in well-planned estates.

When a lifetime gift is made the recipient's basis is the same as the donor's basis.  
The Law Offices of Julia Wald

What the Temporary Law Means to Me and
What Can I Do?

Giant BalloonsOne is mistaken to believe that only people with estates worth $5 million or more need to plan now. Such thinking can potentially cost families tens of thousands, if not more, in estate transfers.

Even if Congress acts, we cannot assume they will set the exemption amount at $5 million.

Further estate planning is done for real life reasons that for many are far more important than tax planning.

At the Law Offices of Julia P Wald (415.482 .7555) the importance of planning for real life concerns is a top priority and we hope it is a top priority for you, too.

Just as the Giants are not planning World Series parades based upon last season's result, you cannot know the estate tax laws beyond December 31, 2012.
The Law Offices of Julia Wald

Julia P. Wald
The Law Offices of Julia Wald
Phone: 415.482.7555
All photos are by Katie Whisman
The Law Offices of Julia Wald