Permanent Estate Taxs Relief for Families

INTRODUCTION
This document,1 prepared by the staff of the Joint Committee on Taxation, provides a
technical explanation of H.R. 4154, the “Permanent Estate Tax Relief for Families, Farmers, and
Small Businesses Act of 2009.”2
1 This document may be cited as follows: Joint Committee on Taxation, Technical Explanation of H.R.
4154, the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009” (JCX-57-09),
December 3, 2009. This document can also be found on our website at www.jct.gov.
2 Except as otherwise noted, all references to sections in this document are to sections of the Internal
Revenue Code of 1986 (“the Code”), as amended.
2
Description of Provision Modifying and Making Permanent the Estate, Gift,
and Generation Skipping Transfer Taxes and Repealing the Modified
Carryover Basis Rules for Property Acquired from a Decedent Who Dies During 2010
Present Law
In general
Gift tax is imposed on certain lifetime transfers, and estate tax is imposed on certain
transfers at death. Generation skipping transfer tax generally is imposed on certain transfers,
either directly or in trust or similar arrangement, to a “skip person” (i.e., a beneficiary in a
generation more than one generation younger than that of the transferor). Transfers subject to
the generation skipping transfer tax include direct skips, taxable terminations, and taxable
distributions.
Exemption equivalent amounts and applicable tax rates
In general
Under present law in effect through 2009 and after 2010, a unified credit is available with
respect to taxable transfers by gift and at death.3 The unified credit offsets tax computed at the
lowest estate and gift tax rates.
Before 2004, the estate and gift taxes were fully unified, such that a single graduated rate
schedule and a single effective exemption amount applied for purposes of determining the tax on
cumulative taxable transfers made by a taxpayer during his or her lifetime and at death. For
years 2004 through 2009, the gift tax and the estate tax continue to be determined using a single
graduated rate schedule, but the effective exemption amount allowed for estate tax purposes is no
longer fully unified with the effective exemption amount allowed for gift tax purposes, as
described below. In 2009, the highest estate and gift tax rate is 45 percent. The unified credit
effective exemption amount is $3.5 million for estate tax purposes and $1 million for gift tax
purposes.
In 2009 and after 2010, the generation skipping transfer tax is imposed using a flat rate
equal to the highest estate tax rate on cumulative generation skipping transfers in excess of the
exemption amount in effect at the time of the transfer. The generation skipping transfer tax
exemption for a given year (prior to repeal, discussed below) is equal to the unified credit
effective exemption amount for estate tax purposes.
Repeal of estate and generation skipping transfer taxes in 2010; modifications to gift
tax
Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”),
the estate and generation skipping transfer taxes are repealed for decedents dying and generation
3 Sec. 2010.
3
skipping transfers made during 2010. The gift tax remains in effect during 2010, with a $1
million exemption amount and a gift tax rate of 35 percent. Also in 2010, except as provided in
regulations, certain transfers in trust are treated as transfers of property by gift, unless the trust is
treated as wholly owned by the donor or the donor’s spouse under the grantor trust provisions of
the Code.
Reinstatement of the estate and generation skipping transfer taxes after December 31,
2010
The estate, gift, and generation skipping transfer tax provisions of EGTRRA are
scheduled to sunset after 2010, such that those provisions (including repeal of the estate and
generation skipping transfer taxes) do not apply to estates of decedents dying, gifts made, or
generation skipping transfers made after December 31, 2010. As a result, in general, the estate,
gift, and generation skipping transfer tax rates and exemption amounts that would have been in
effect had EGTRRA not been enacted apply for estates of decedents dying, gifts made, or
generation skipping transfers made in 2011 and later years. A single graduated rate schedule
with a top rate of 55 percent and a single effective exemption amount of $1 million applies for
purposes of determining the tax on cumulative taxable transfers made by a taxpayer through
lifetime gift or bequest.
Basis in property received
In general
Gain or loss, if any, on the disposition of property is measured by the taxpayer’s amount
realized (i.e., gross proceeds received) on the disposition, less the taxpayer’s basis in such
property.4 Basis generally represents a taxpayer’s investment in property, with certain
adjustments required after acquisition. For example, basis is increased by the cost of capital
improvements made to the property and is decreased by depreciation deductions taken with
respect to the property.
Basis in property received by lifetime gift
Under present law, property received from a donor of a lifetime gift takes a carryover
basis, with modifications in certain circumstances.5 “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 is increased, but not above fair market value, by any gift tax paid by
the donor. The basis of property transferred by a lifetime gift cannot exceed the property’s fair
market value on the date of the gift. If the basis of the property is greater than the fair market
value of the property on the date of the gift, then, for purposes of determining loss from a
subsequent sale of the property, the basis is the property’s fair market value on the date of the
gift.
4 Sec. 1001.
5 Sec. 1015.
4
Basis in property received from a decedent who dies before 2010
Under present law in effect through 2009, property passing from a decedent’s estate
generally takes a “stepped-up” basis.6 In other words, the basis of property passing from a
decedent’s estate generally is the fair market value on the date of the decedent’s death (or, if the
alternate valuation date is elected, the earlier of six months after the decedent’s death or the date
the property is sold or distributed by the estate). This increase or “step up” in basis eliminates
the recognition of income on any appreciation of the property that occurred while the decedent
held the property. If the value of property on the date of the decedent’s death (or the alternate
valuation date) is less than its adjusted basis, the property takes a stepped-down basis when it
passes from a decedent’s estate. This stepped-down basis eliminates any potential tax benefit
from any unrealized loss.
There is an exception to the rule that assets subject to the Federal estate tax receive
stepped-up basis in the case of “income in respect of a decedent.”7 Assets that are “income in
respect of a decedent” take a carryover basis (i.e., the basis of such assets to the estate or heir is
the same as it was in the hands of the decedent) increased by estate tax paid on that asset.
Income in respect of a decedent includes rights to income that has been earned, but not
recognized, by the date of death (e.g., wages that were earned, but not paid, before death),
individual retirement accounts (“IRAs"), and assets held in accounts governed by section 401(k).
In community property states, a surviving spouse’s one-half share of community property
held by the decedent and the surviving spouse generally is treated as having passed from the
decedent and, thus, is eligible for stepped-up basis. Under present law in effect through 2009,
this rule applies if at least one-half of the whole of the community interest is includible in the
decedent’s gross estate.
Basis in property received from a decedent who dies during 2010
In 2010, upon repeal of the estate tax, the rules providing for date-of-death fair market
value (“stepped-up”) basis in property acquired from a decedent are repealed, and a modified
carryover basis regime under section 1022 of the Code takes effect. Under this regime,
recipients of property acquired from a decedent at the decedent’s death receive a basis equal to
the lesser of the decedent’s adjusted basis or the fair market value of the property on the date of
the decedent’s death. The modified carryover basis rules apply to property acquired by bequest,
devise, or inheritance, or property acquired by the decedent’s estate from the decedent, property
passing from the decedent to the extent such property passed without consideration, and certain
other property to which the prior law rules apply, other than property that is income in respect of
a decedent. Property acquired from a decedent is treated as if the property had been acquired by
gift. Thus, the character of gain on the sale of property received from a decedent’s estate is
carried over to the heir. For example, real property that has been depreciated and would be
subject to recapture if sold by the decedent will be subject to recapture if sold by the heir.
6 Sec. 1014.
7 Sec. 1014(c).
5
An executor generally may step up the basis in assets owned by the decedent and
acquired by the beneficiaries at death, subject to certain special rules and exceptions. Under
these rules, each decedent’s estate generally is permitted to increase the basis of assets
transferred by $1.3 million. The $1.3 million amount is increased by the amount of unused
capital losses, net operating losses, and certain “built-in” losses of the decedent. 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 at least $4.3
million. Nonresidents who are not U.S. citizens may increase the basis of property by at least
$60,000. The $60,000, $1.3 million, and $3 million amounts are adjusted annually for inflation
after 2010.
Repeal of modified carryover basis regime for determining basis in property received
from a decedent who dies after December 31, 2010
As described above, the estate, gift, and generation skipping transfer tax provisions of
EGTRRA are scheduled to sunset after 2010, such that those provisions do not apply to estates of
decedents dying, gifts made, or generation skipping transfers made after December 31, 2010. As
a result, the modified carryover basis regime in effect for determining basis in property passing
from a decedent who dies during 2010 does not apply for purposes of determining basis in
property received from a decedent who dies after December 31, 2010. After that time, the law in
effect before 2010, which generally provides for stepped-up basis in property passing from a
decedent, applies.
State death tax credit; deduction for State death taxes paid
State death tax credit under prior law
Before 2005, a credit was allowed against the Federal estate tax for any estate,
inheritance, legacy, or succession taxes actually paid to any State or the District of Columbia
with respect to any property included in the decedent’s gross estate ("State death taxes"). The
maximum amount of credit allowable for State death taxes was determined under a graduated
rate table, the top rate of which was 16 percent, based on the size of the decedent’s adjusted
taxable estate. Most States imposed a “pick-up” or “soak-up” estate tax equal to the maximum
Federal credit allowed.
Phase-out of State death tax credit; deduction for State death taxes paid
Under EGTRRA, the amount of allowable State death tax credit was reduced each year
from 2002 through 2004. For decedents dying after 2004, the State death tax credit was repealed
and replaced with a deduction for death taxes actually paid to any State or the District of
Columbia, in respect of property included in the gross estate of the decedent. To claim the
deduction for State death taxes, such taxes must be paid and claimed before the later of: (1) four
years after the filing of the estate tax return; or (2) (a) 60 days after a decision of the U.S. Tax
Court determining the estate tax liability becomes final, (b) the expiration of the period of
extension to pay estate taxes over time under section 6166, or (c) the expiration of the period of
limitations in which to file a claim for refund or 60 days after a decision of a court in which such
refund suit becomes final.
6
Reinstatement of State death tax credit for decedents dying after December 31, 2010
As described above, the estate, gift, and generation skipping transfer tax provisions of
EGTRRA are scheduled to sunset after 2010, such that those provisions do not apply to estates of
decedents dying, gifts made, or generation skipping transfers made after December 31, 2010. As
a result, neither the EGTRRA modifications to the State death tax credit nor the replacement of
the credit with a deduction applies for decedents dying after December 31, 2010. Instead, the
State death tax credit as in effect before the above-described EGTRRA phase-out and
modifications applies.
Exclusions and deductions
Gift tax annual exclusion
Under present law, a donor of a lifetime gift is allowed an annual exclusion of $13,000
(for 2009 and 2010) on a transfer of a present interest in property to any one donee during the
taxable year.8 If a non-donor spouse consents to split the gift with the donor spouse, the annual
exclusion is $26,000 for 2009 and 2010. The dollar amounts are indexed for inflation.
Transfers to a surviving spouse
A 100-percent marital deduction generally is permitted for the value of property
transferred between spouses.9 In addition, 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 under section 2056 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.
A marital deduction generally is denied for property passing to a surviving spouse who is
not a citizen of the United States.10 A marital deduction is permitted, however, for property
passing to a “qualified domestic trust” of which the noncitizen surviving spouse is a beneficiary.
A qualified domestic trust is a trust that has as its trustee at least one U.S. citizen or U.S.
corporation. No corpus may be distributed from a qualified domestic trust unless the U.S. trustee
has the right to withhold any estate tax imposed on the distribution. There is an estate tax
imposed on (1) any distribution from a qualified domestic trust before the date of the death of the
noncitizen surviving spouse and (2) the value of the property remaining in a qualified domestic
trust on the date of death of the noncitizen surviving spouse. The tax is computed as an
additional estate tax on the estate of the first spouse to die.
8 Sec. 2503(b).
9 Sec. 2523.
10 Sec. 2523(i)(1).
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Conservation easements
Under section 2031(c), an executor generally may elect to exclude from the taxable estate
40 percent of the value of any land subject to a “qualified conservation easement,” up to a
maximum exclusion of $500,000. The exclusion percentage is reduced by two percentage points
for each percentage point (or fraction thereof) by which the value of the qualified conservation
easement is less than 30 percent of the value of the land (determined without regard to the value
of such easement and reduced by the value of any retained development right).
Before 2001, a qualified conservation easement generally was one that met the following
requirements: (1) the land was located within 25 miles of a metropolitan area (as defined by the
Office of Management and Budget) or a national park or wilderness area, or within 10 miles of
an Urban National Forest (as designated by the Forest Service of the U.S. Department of
Agriculture); (2) the land had been owned by the decedent or a member of the decedent’s family
at all times during the three-year period ending on the date of the decedent’s death; and (3) a
qualified conservation contribution (within the meaning of section 170(h)) of a qualified real
property interest (as generally defined in section 170(h)(2)(C)) exclusively for a conservation
purpose (within the meaning of section 170(h)(4)) was granted by the decedent or a member of
his or her family. Preservation of a historically important land area or a certified historic
structure does not qualify as a conservation purpose for purposes of section 2031(c).
Effective for estates of decedents dying after December 31, 2000, EGTRRA expands the
availability of qualified conservation easements by eliminating the requirement that the land be
located within a certain distance of a metropolitan area, national park, wilderness area, or Urban
National Forest. A qualified conservation easement may be claimed with respect to any land that
is located in the United States or its possessions. EGTRRA also clarifies that the date for
determining easement compliance is the date on which the donation is made.
As described above, the estate, gift, and generation skipping transfer tax provisions of
EGTRRA are scheduled to sunset after 2010, such that those provisions do not apply to estates of
decedents dying, gifts made, or generation skipping transfers made after December 31, 2010. As
a result, the EGTRRA modifications to eliminate the geographic restriction for qualified
conservation easements and to clarify the date for easement compliance do not apply for
decedents dying after December 31, 2010.
Provisions affecting small and family-owned businesses and farms
Special-use valuation
An executor may elect to value for estate tax purposes certain “qualified real property”
used in farming or another qualifying closely-held trade or business at its current-use value,
rather than its fair market value.11 The maximum reduction in value for such real property is $1
million for 2009 and 2010. Real property generally can qualify for this "special-use" valuation if
at least 50 percent of the adjusted value of the decedent’s gross estate consists of farm or closely-
11 Sec. 2032A.
8
held business assets (including both real and personal property) and at least 25 percent of the
adjusted value of the gross estate consists of farm or closely-held business real property. In
addition, the property must be used in a qualified use (e.g., farming) by the decedent or a
member of the decedent’s family for five of the eight years immediately preceding the
decedent’s death.
If, after a special-use valuation election is made, the heir who acquired the real property
ceases to use it in its qualified use within 10 years of the decedent’s death, an additional estate
tax is imposed in order to recapture the entire estate-tax benefit of the special-use valuation.
Family-owned business deduction
Before 2004, an estate was permitted to deduct the adjusted value of a “qualified familyowned
business interest” of the decedent, up to $675,000.12 A qualified family-owned business
interest generally is defined as any interest in a trade or business (regardless of the form in which
it is held) with a principal place of business in the United States if the decedent’s family owns at
least 50 percent of the trade or business, two families own 70 percent, or three families own 90
percent, as long as the decedent’s family owns, in the case of the 70-percent and 90-percent
rules, at least 30 percent of the trade or business.
To qualify for the exclusion, the decedent (or a member of the decedent’s family) must
have owned and materially participated in the trade or business for at least five of the eight years
preceding the decedent’s date of death. In addition, at least one qualified heir (or member of the
qualified heir’s family) is required to materially participate in the trade or business for at least 10
years following the decedent’s death. The qualified family-owned business rules provide for a
graduated recapture based on the number of years after the decedent’s death within which a
disqualifying event occurred.
In general, there is no requirement that the qualified heir (or members of his or her
family) continue to hold or participate in the trade or business more than 10 years after the
decedent’s death. However, the 10-year recapture period can be extended for a period of up to
two years if the qualified heir does not materially participate in the trade or business for a period
of up to two years after the decedent’s death.
EGTRRA repealed the qualified family-owned business deduction for estates of
decedents dying after December 31, 2003. As described above, the estate, gift, and generation
skipping transfer tax provisions of EGTRRA are scheduled to sunset after 2010, such that those
provisions do not apply to estates of decedents dying, gifts made, or generation skipping
12 The qualified family-owned business deduction and the unified credit effective exemption amount are
coordinated. If the maximum deduction amount of $675,000 is elected, then the unified credit effective exemption
amount is $625,000, for a total of $1.3 million. If the qualified family-owned business deduction is less than
$675,000, then the unified credit effective exemption amount of $625,000 is increased by the difference between
$675,000 and the amount of the qualified family-owned business deduction. However, the unified credit effective
exemption amount cannot be increased above $675,000. Because of the coordination between the qualified familyowned
business deduction and the unified credit effective exemption amount, the qualified family-owned business
deduction would not provide a benefit in any year in which the applicable exclusion amount exceeds $1.3 million.
9
transfers made after December 31, 2010. As a result, the qualified family-owned business
deduction is available to estates of decedents dying after December 31, 2010.
Installment payment of estate tax for closely held businesses
Under present law, the estate tax generally is due within nine months of a decedent’s
death. However, an executor generally may elect to pay estate tax attributable to an interest in a
closely held business in two or more (but no more than 10) installments. An estate is eligible for
payment of estate tax in installments if the value of the decedent’s interest in a closely held
business exceeds 35 percent of the decedent’s adjusted gross estate (i.e., the gross estate less
certain deductions). If the election is made, the estate may defer payment of principal and pay
only interest for the first five years, followed by up to 10 annual installments of principal and
interest. This election effectively extends the time for paying estate tax by 14 years from the
original due date of the estate tax. A special two-percent interest rate applies to the amount of
deferred estate tax attributable to the first $1.33 million (in 2009)13 in taxable value of a closely
held business. The interest rate applicable to the amount of estate tax attributable to the taxable
value of the closely held business in excess of $1.33 million (in 2009) is equal to 45 percent of
the rate applicable to underpayments of tax under section 6621 (i.e., 45 percent of the Federal
short-term rate plus two percentage points). Interest paid on deferred estate taxes is not
deductible for estate or income tax purposes.
Under pre-EGTRRA law, for purposes of these rules an interest in a closely held business
was: (1) an interest as a proprietor in a sole proprietorship; (2) an interest as a partner in a
partnership carrying on a trade or business if 20 percent or more of the total capital interest of
such partnership was included in the decedent’s gross estate or the partnership had 15 or fewer
partners; and (3) stock in a corporation carrying on a trade or business if 20 percent or more of
the value of the voting stock of the corporation was included in the decedent’s gross estate or
such corporation had 15 or fewer shareholders.
Under present and pre-EGTRRA law, the decedent may own the interest directly or, in
certain cases, indirectly through a holding company. If ownership is through a holding company,
the stock must be non-readily tradable (as defined in section 6166(b)(7)(B)). If stock in a
holding company is treated as business company stock for purposes of the installment payment
provisions, the five-year deferral for principal and the two-percent interest rate do not apply.
The value of any interest in a closely held business does not include the value of that portion of
such interest attributable to passive assets held by such business.
Effective for estates of decedents dying after December 31, 2001, EGTRRA expands the
definition of a closely held business for purposes of installment payment of estate tax. EGTRRA
increases from 15 to 45 the maximum number of partners in a partnership and shareholders in a
corporation that may be treated as a closely held business in which a decedent held an interest,
and thus will qualify the estate for installment payment of estate tax.
13 This amount is adjusted annually for inflation after 1998. The original amount for 1998 was $1 million.
The 2010 amount is $1.34 million.
10
EGTRRA also expands availability of the installment payment provisions by providing
that an estate of a decedent with an interest in a qualifying lending and financing business (as
defined in section 6166(b)(10)) is eligible for installment payment of the estate tax. EGTRRA
provides that an estate with an interest in a qualifying lending and financing business that claims
installment payment of estate tax must make installment payments of estate tax (which will
include both principal and interest) relating to the interest in a qualifying lending and financing
business over five years.
EGTRRA clarifies that the installment payment provisions require that only the stock of
holding companies, not the stock of operating subsidiaries, must be non-readily tradable to
qualify for installment payment of the estate tax. EGTRRA provides that an estate with a
qualifying property interest held through holding companies that claims installment payment of
estate tax must make all installment payments of estate tax (which will include both principal
and interest) relating to a qualifying property interest held through holding companies over five
years.
As described above, the estate, gift, and generation skipping transfer tax provisions of
EGTRRA are scheduled to sunset after 2010, such that those provisions do not apply to estates of
decedents dying, gifts made, or generation skipping transfers made after December 31, 2010. As
a result, the EGTRRA modifications to the estate tax installment payment rules described above
do not apply for estates of decedents dying after December 31, 2010; instead, the installment
payment rules generally in effect prior to the EGTRRA modifications will apply.
Generation-skipping transfer tax rules
In general
A generation skipping transfer tax generally is imposed on transfers, either directly or in
trust or similar arrangement, to a skip person (as defined above).14 Transfers subject to the
generation skipping transfer tax include direct skips, taxable terminations, and taxable
distributions.15 An exemption generally equal to the estate tax effective exemption amount is
provided for each person making generation skipping transfers. The exemption may be allocated
by a transferor (or his or her executor) to transferred property.
A direct skip is any transfer subject to estate or gift tax of an interest in property to a skip
person.16 Natural persons or certain trusts may be skip persons. All persons assigned to the
second or more remote generation below the transferor are skip persons (e.g., grandchildren and
great-grandchildren). Trusts are skip persons if (1) all interests in the trust are held by skip
persons, or (2) no person holds an interest in the trust and at no time after the transfer may a
distribution (including distributions and terminations) be made to a non-skip person. A taxable
termination is a termination (by death, lapse of time, release of power, or otherwise) of an
14 Sec. 2601.
15 Sec. 2611.
16 Sec. 2612(c).
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interest in property held in trust unless, immediately after such termination, a non-skip person
has an interest in the property, or unless at no time after the termination may a distribution
(including a distribution upon termination) be made from the trust to a skip person.17 A taxable
distribution is a distribution from a trust to a skip person (other than a taxable termination or
direct skip).18 If a transferor allocates generation skipping transfer tax exemption to a trust prior
to the taxable distribution, generation skipping transfer tax may be avoided.
The tax rate on generation skipping transfers is a flat rate of tax equal to the maximum
estate and gift tax rate in effect at the time of the transfer multiplied by the “inclusion ratio.” The
inclusion ratio with respect to any property transferred in a generation skipping transfer indicates
the amount of “generation skipping transfer tax exemption” allocated to a trust. The allocation
of generation skipping transfer tax exemption effectively reduces the tax rate on a generation
skipping transfer.
If an individual makes a direct skip during his or her lifetime, any unused generationskipping
transfer tax exemption is automatically allocated to a direct skip to the extent necessary
to make the inclusion ratio for such property equal to zero. An individual can elect out of the
automatic allocation for lifetime direct skips.
Under pre-EGTRRA law, for lifetime transfers made to a trust that were not direct skips,
the transferor had to make an affirmative allocation of generation skipping transfer tax
exemption; the allocation was not automatic. If generation skipping transfer tax exemption was
allocated on a timely filed gift tax return, then the portion of the trust that was exempt from
generation skipping transfer tax was based on the value of the property at the time of the transfer.
If, however, the allocation was not made on a timely filed gift tax return, then the portion of the
trust that was exempt from generation skipping transfer tax was based on the value of the
property at the time the allocation of generation skipping transfer tax exemption was made.
In any year, an election to allocate generation skipping transfer tax to a specific transfer
generally may be made at any time up to the time for filing the transferor’s estate tax return.
Modifications to the generation skipping transfer tax rules under EGTRRA
Generally effective after 2000, EGTRRA modifies and adds certain mechanical rules
related to the generation skipping transfer tax. First, EGTRRA generally provides that
generation skipping transfer tax exemption will be allocated automatically to transfers made
during life that are “indirect skips.” An indirect skip is any transfer of property (that is not a
direct skip) subject to the gift tax that is made to a generation skipping transfer trust, as defined
in the Code. If any individual makes an indirect skip during the individual’s lifetime, then any
unused portion of such individual’s generation skipping transfer tax exemption is allocated to the
property transferred to the extent necessary to produce the lowest possible inclusion ratio for
such property.
17 Sec. 2612(a).
18 Sec. 2612(b).
12
Second, EGTRRA provides that, under certain circumstances, generation skipping
transfer tax exemption can be allocated retroactively when there is an unnatural order of death.
In general, if a lineal descendant of the transferor predeceases the transferor, then the transferor
can allocate any unused generation skipping transfer tax exemption to any previous transfer or
transfers to the trust on a chronological basis.
Third, EGTRRA provides that a trust that is only partially subject to generation skipping
transfer tax because its inclusion ratio is less than one can be severed in a “qualified severance.”
A qualified severance generally is defined as the division of a single trust and the creation of two
or more trusts, one of which would be exempt from generation skipping transfer tax and another
of which would be fully subject to generation skipping transfer tax, if (1) the single trust was
divided on a fractional basis, and (2) the terms of the new trusts, in the aggregate, provide for the
same succession of interests of beneficiaries as are provided in the original trust.
Fourth, EGTRRA provides that in connection with timely and automatic allocations of
generation skipping transfer tax exemption, the value of the property for purposes of determining
the inclusion ratio shall be its finally determined gift tax value or estate tax value depending on
the circumstances of the transfer. In the case of a generation skipping transfer tax exemption
allocation deemed to be made at the conclusion of an estate tax inclusion period, the value for
purposes of determining the inclusion ratio shall be its value at that time.
Fifth, under EGTRRA, the Secretary of the Treasury generally is authorized and directed
to grant extensions of time to make the election to allocate generation skipping transfer tax
exemption and to grant exceptions to the time requirement, without regard to whether any period
of limitations has expired. If such relief is granted, then the gift tax or estate tax value of the
transfer to trust would be used for determining generation skipping transfer tax exemption
allocation.
Sixth, EGTRRA provides that substantial compliance with the statutory and regulatory
requirements for allocating generation skipping transfer tax exemption will suffice to establish
that generation skipping transfer tax exemption was allocated to a particular transfer or a
particular trust. If a taxpayer demonstrates substantial compliance, then so much of the
transferor’s unused generation skipping transfer tax exemption will be allocated as produces the
lowest possible inclusion ratio.
Sunset of EGTRRA modifications to the generation skipping transfer tax rules
As described above, the estate, gift, and generation skipping transfer tax provisions of
EGTRRA are scheduled to sunset after 2010, such that those provisions do not apply to estates of
decedents dying, gifts made, or generation skipping transfers made after December 31, 2010. As
a result, the EGTRRA modifications to the generation skipping transfer tax rules described above
do not apply for generation skipping transfers made after December 31, 2010. Instead, in
general, the rules as in effect prior to the EGTRRA modifications apply.
Description of Bill
The bill generally makes permanent the present-law estate, gift, and generation skipping
transfer tax laws in effect for 2009. Under the bill, the unified credit effective exemption amount
13
for estate tax purposes is $3.5 million for decedents dying during 2010 and later years. The
unified credit effective exemption amount for gift tax purposes is $1 million for 2010 and later
years. The highest estate and gift tax rate is 45 percent, as under present law in effect for 2009.
As under present law, the generation skipping transfer tax exemption is equal to the
unified credit effective exemption amount for estate tax purposes ($3.5 million), and the
generation skipping transfer tax rate is determined using the highest estate and gift tax rate (45
percent).
The bill repeals the modified carryover basis rules that, under EGTRRA, would apply for
purposes of determining basis in property acquired from a decedent who dies in 2010. Under the
bill, property acquired from a decedent who dies after December 31, 2009, generally will receive
date-of-death fair market value basis (i.e., “stepped up” basis) under the basis rules in effect in
2009.
The bill makes permanent the repeal of the State death tax credit; as under present law in
effect for 2009, the bill allows a deduction for death taxes paid to any State or the District of
Columbia. In addition, the bill makes permanent the repeal of the qualified family-owned
business deduction.
The bill repeals the sunset of the EGTRRA estate, gift, and generation skipping transfer
tax provisions scheduled to occur for decedents dying, gifts made, and generation skipping
transfers made after December 31, 2010. As a result, the bill makes permanent the abovedescribed
EGTRRA modifications to the rules regarding (1) qualified conservation easements,
(2) installment payment of estate taxes, and (3) various technical aspects of the generation
skipping transfer tax.
Effective Date
The bill is effective for estates of decedents dying, generation skipping transfers made,
and gifts made after December 31, 2009.