Legislation tra 2010 12 21_10_md_final

Estate, Gift and Generation-Skipping Transfer Tax
Provisions of “Tax Relief... Act of 2010,” Enacted
December 17, 2010

December 21, 2010
Steve R. Akers
Bessemer Trust
300 Crescent Court, Suite 800
Dallas, Texas 75201
214-981-9407
akers@bessemer.com

Republican leaders came to agreement with President Obama on December 6, 2010 to extend the “Bush
income tax rates” for two years, not limited to just “middle class” taxpayers with less than $200,000
($250,000 joint returns) and to extend unemployment benefits. Surprisingly, the agreement included
extension of the estate tax for two years with a $5 million exemption and 35% rate (the exemption
amount and rate urged by various Republican leaders over the last several years). (Apparently, the final
“sticking points” in coming “making a deal” on the overall agreement were the estate tax provisions
requested by Republican leaders and the renewal of “refundable tax credits” as urged by the
Administration, and the final agreement came in meetings between Vice President Biden and Senate
Minority Leader Mitch McConnell.)
Following discussions (and probably negotiations) with Congressional staffers about the details of the
estate tax provisions and all of the other details of the broad agreement regarding taxes and
unemployment insurance, the Senate Finance Committee released an amendment sponsored by Senators
Harry Reid and Mitch McConnell containing the statutory language being considered by the Senate. The
bill is an amendment of H.R. 4853 (which authorizes funding of the Airport and Airway Trust Fund),
and proposes the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of
2010.” (This proposal is referred to in this summary as “TRA 2010.”)
The TRA 2010 proposal comes on the heels of a proposal by Senate Finance Committee Chair Max
Baucus on December 2, 2010 of a Senate amendment of the same H.R. 4853, which amendment
proposed the “Middle Class Tax Cut Act of 2010.” That bill was defeated by the Senate on December 4,
2010, but of interest to the estate planning community are various estate and gift tax measures that were
included in it. The following is a link to the “Baucus bill” containing the proposed Middle Class Tax Cut
Act of 2010, a Summary of the proposal, and estimated budget effects of the proposal:
http://finance.senate.gov/legislation/details/?id=bda915fc-5056-a032-5262-6a1899fee4e3. The following
summary sometimes refers to differences between TRA 2010 and the “Baucus bill.”
TRA 2010 was approved by the Senate on December 15 (by a vote of 81-19) and by the House on
December 16 (by a vote of 277-148). President Obama signed the legislation on December 17, 2010
(the date of enactment). Text of the legislation is available at
http://finance.senate.gov/legislation/details/?id=10874ed6-5056-a032-52cd-99708697eff0. Joint
Committee on Taxation revenue estimates of the bill are available at
http://op.bna.com/dt.nsf/r?Open=vmar-8bz3bn.

General Provisions
(1) Short Title. The “short” title is “Tax Relief, Unemployment Insurance Authorization, and Job
Creation Act of 2010.” [TRA 2010 § 1.] How’s that for a short title?
(2) Temporary Extension of Tax Relief. TRA 2010 generally provides various tax provisions that
apply for just two years. This is accomplished first by extending the provisions of the Economic
Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) generally for two years,
including the extension of the “Bush tax cuts” and the estate tax provisions. [TRA 2010 § 101(a)
amends EGTRAA (effective as if enacted as part of EGTRRA in 2001) by amending section 901
of EGTRRA (the sunset provision) to extend the EGTRRA sunset to specified events occurring
after December 31, 2012 (instead of December 31, 2010). Therefore, all of the provisions of
EGTRRA generally are extended through 2012.]
In addition, TRA 2010 provides that the EGTRRA sunset provisions in section 901 of EGTRRA
apply to all of the amendments in the title containing the estate and gift tax provisions. [TRA
2010 § 304 says that section 901 of EGTRRA applies “to the amendments made by this section”
(apparently it meant to say “this title” to refer to all of the “Temporary Estate Tax Relief”

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provisions in title III of TRA 2010), so the estate, gift and GST tax amendments made by TRA
2010 also sunset after 2012.]

Brief Summary of Highlights of Tax Provisions Other Than Estate, Gift and GST Tax Provisions
(1) Income Tax Rates. Taxpayers at every income level would have the lower rates enacted in
EGTRRA continued for two years. The top rate, on taxable income above $379,150, would stay
at 35% instead of increasing to 39.6%. (Two-year cost: $186.8 billion)
(2) Itemized Deductions. The personal exemption phase-out and itemized deduction limitation were
both repealed for one year under EGTRRA. The repeal of both of these provisions is extended for
an additional two years. This is important, for example, with respect to deductions available for
large charitable contributions. Prior to the phase-out of the limitations on itemized deductions,
the allowable total amount of itemized deductions was reduced by 3% of the amount by which
the taxpayer’s adjusted gross income exceeded a threshold amount that was indexed annually for
inflation. The otherwise allowable itemized deductions could not be reduced by more than 80%.
For high income taxpayers, reducing the otherwise allowable charitable deductions (as well as
other itemized deductions) by as much as 80% is a substantial tax detriment. (Cost: $20.7 billion)
(3) Capital Gains and Dividends Rates. Lower capital gains and dividend rates are extended for two
years. The lower rates are: taxpayers below 25% bracket: 0%, taxpayers above 25% bracket
15%. If those rates expire, the rates would become 10% and 20%, respectively, and dividend
would be taxed as ordinary income. (Cost: $53.2 billion)
(4) Social Security Tax Cut of 2%. All taxpayers, including self-employed individuals, have a one
year reduction in the “social security payroll tax” of 2 percentage points in 2011. For individuals,
the employee rate is reduced from 6.2% to 4.2% (the old age, survivors, and disability insurance
tax on the taxable wage base ($106,800 in 2010)). The employer tax rate remains at 6.2%. For
self-employed individuals, the rate is reduced from 12.4% to 10.4% for taxable years of
individuals that begin in 2011. (Cost: $112 billion)
(5) Alternative Minimum Tax. The AMT exemption amounts are increased to $47,450 ($72, 450 for
joint returns) for 2010 and to $48,450 ($74,450 for joint returns) for 2011. (Over 20 million
households are spared from tax increases averaging $3,900 as a result of this change.) (Cost:
$136.7 billion)
(6) IRA Charitable Rollover. Among the tax extenders are the IRA Charitable Rollover, which
technically expired at the end of 2009. The IRA Charitable Rollover is extended for two years,
through 2011, which allows individuals who are at least 70 ½ to transfer up to $100,000 per year
directly to a qualified public charity (not a donor advised fund or supporting organization)
without being treated as a taxable withdrawal from the IRA. The transfer can be counted toward
the required minimum distribution. The measure applies to all charitable distributions throughout
2010, and distributions made any time during 2010 or in January of 2011 can be counted toward
their $100,000 limit for 2010. Individuals who have already taken their 2010 required minimum
distributions cannot “undo” those distributions and instead make a charitable distribution to
satisfy their 2010 required minimum distributions. (Cost: $979 million)
(7) Deduction for State and Local Sales Taxes. The federal deduction for state and local sales taxes is
extended for 2010 and 2011. (This is near and dear to residents of Texas and the other eight
states without state income taxes.) (Cost: $5.5 billion)
(8) Estate, Gift and GST Tax Cost. The estate, gift and GST provisions are discussed in detail below.
(Cost: $68.1 billion)

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General Summary of Estate, Gift and GST Tax Provisions
(1) Estate, Gift and GST Tax Exemptions and Rates. TRA 2010 generally sets the estate, gift and
GST exemption at $5.0 million, indexed from 2010 beginning in 2012, [TRA 2010 § 302(a)(1)]
and sets the maximum rate at 35%. [TRA 2010 § 302(a)(2)]. The exemption generally applies in
2010 [TRA § 302(f)], except that the gift exemption remains at $1.0 million for 2010 [TRA §
302(b)(1)(B)]. (Also, as discussed below, the bill appears not to have a $5.0 million estate or GST
exemption in 2010 for estates that elect for carryover basis to apply instead of the estate tax in
2010, but this is a technicality that may be corrected before the Senate acts on the bill.)
(2) Estate Tax in 2010.
a. Default Rule — Estate Tax Applies in 2010. The estate tax applies to estates of decedents
dying in 2010. As discussed above, the estate tax exemption in 2010 is $5.0 million and
the rate is 35%. (For various issues discussed below, it is important to keep in mind that
the default rule is that the estate tax applies in 2010.) This reenactment of the estate tax
for 2010 is in a complicated section of TRA 2010 that sunsets certain provisions of
EGTRRA as if they had never been enacted. TRA 2010 §301(a) provides that “[e]ach
provision of subtitle A or E of title V of [EGTRRA] is amended to read as such provision
would read if such subtitle had never been enacted.” Subtitle A contains I.R.C. § 2210,
which says that Chapter 11 [containing the estate tax provisions] does not apply to
decedents dying after 2009 (except as to certain distributions from QDOTs) and I.R.C. §
2664 (which says that Chapter 13 does not apply to GST transfers after 2009). Subtitle E
contains the carryover basis provisions. The Code would be interpreted as if those
provisions of EGTRRA (repealing the estate and GST tax and enacting carryover basis)
had never been enacted. [TRA 2010 § 301(a).] The provision retroactively applies to
decedents dying after December 31, 2009. [TRA 2010 § 301(e).]
b. Carryover Basis Election for 2010 Decedents. Executors (within the meaning of I.R.C. §
2203) of estates of decedents who die in 2010 (all of 2010, not just decedents who die on
or before the date of enactment, as provided in the Baucus bill) may elect to have the
modified basis rules of I.R.C. § 1022 apply “with respect to property acquired or passing
from the decedent” within the meaning of I.R.C. § 1014(b)) instead of the estate tax.
[TRA 2010 § 301(c).] Large estates (not covered by the $5 million exemption) that would
otherwise have to pay substantial estate taxes will likely make this election. However, the
executor will have to consider a variety of factors in making this decision, such as the
amount of estate tax payable currently vs. the gain that would be subject to income tax on
a future sale of assets, anticipated dates of sale, ability to allocate basis adjustments up to
fair market value at the date of death for assets that will likely be sold in the near future,
anticipated future capital gains rates (and ordinary income rates for “ordinary income
property”), and weighing the present value of anticipated income tax costs against the
current estate tax amount.
This carryover basis election is described in TRA 2010 § 301(c). It is a complicated
section, applying double and triple negatives.
“Notwithstanding subsection (a) [which says that subtitle A or E of title V of
EGTRAA are treated as having never been enacted], in the case of a decedent dying
after December 31, 2009, and before January 1, 2011, the executor (within the
meaning of section 2203 of the Internal Revenue Code of 1986) may elect to apply
such Code as though the amendments made by subsection (a) do not apply with

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respect to chapter 11 of such Code and with respect to property acquired or
passing from such decedent (within the meaning of section 1014(b) of such
Code.)” TRA 2010 § 301(c).
Applying this language in steps:
• If this election is made, the amendments made by TRA 2010 § 301(a) do not
apply. This involves a triple negative. The estate tax was repealed by I.R.C. § 2210
(“chapter 11 shall not apply…”), which was included in subtitle A of title V of
EGTRRA, for decedents dying after 2009 (Negative 1-estate tax not apply). The
repeal of the estate tax is repealed, effective 1-1-2010, under TRA 2010 § 301(a)
(as if subtitle A “had never been enacted”) (Negative 2, negating Negative 1-so
estate tax does apply). If the carryover basis election is made, the “repeal of the
repeal” in TRA 2010 § 301(a) does not apply (Negative 3). This means that the
estate tax does not apply. (Is your head swimming yet?)
• Similarly, carryover basis does apply under a similar stepped analysis. Carryover
basis was instituted under I.R.C. § 1022, as included in subtitle E of title V of
EGTRRA for decedents dying after 2009. The carryover basis provisions are
repealed, effective 1-1-2010, under TRA 2010 § 301(a) (as if subtitle E “had never
been enacted”). If the carryover basis election is made, the amendments in TRA
2010 § 301(a) do not apply, so the repeal of carryover basis is undone, so
carryover basis does apply.
• The election (which undoes the “repeal of the repeal” of the estate tax and
reinstitutes carryover basis) applies “with respect to chapter 11 of such Code….”
This clause, perhaps among other things, means that the amendment in § 301(a)
that repeals subtitle A of title V of EGTRRA, which contained I.R.C. § 2210
repealing the estate tax and §2664 repealing the GST tax, does not apply with
respect to chapter 11 (meaning that the estate tax is repealed), but does continue to
apply with respect to the repeal of §2664. Therefore, the repeal of the GST tax is
not undone. That is a technical correction of the similar provision in the Baucus
bill.
• The election applies “with respect to property acquired or passing from such
decedent (within the meaning of section 1014(b)…).” This is an obvious reference
to carryover basis applying for property acquired or passing from the decedent. (It
would seem that the provision could have referred just to property “acquired from
such decedent” because I.R.C. § 1022(e), which remains in effect because subtitle
E of title V of EGTRRA is not repealed as a result of the election, defines
“property acquired from the decedent” as including property passing from the
decedent by reason of death to the extent that it passes without consideration.)
If the carryover basis election is made, the last sentence of TRA 2010 § 301(c) adds that
for purposes of I.R.C. § 2652(a)(1), “the determination of whether any property is subject
to the tax imposed by such chapter 11 shall be made without regard to any election made
under this subsection.” Section 2652(a)(1) defines “transferor” for GST tax purposes as
the last person who was subject to a transfer tax. This sentence means that for GST
purposes the decedent is deemed to be subject to the estate tax and is therefore the
“transferor” even though chapter 11 does not apply to the decedent in that circumstance.
See the discussion below in Item (3) the GST Issues section of this summary.

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c. Extension of Time to File and Pay Estate Tax and GST Tax and to Make Disclaimers.
(1) Estate Tax. The estate tax return and payment date of estate tax is extended to no
earlier than nine months after the date of enactment. The extension applies to
estates of decedents dying from January 1, 2010 to the day before the date of
enactment. (The extension in the Baucus bill was only for four months rather than
nine months.) [TRA 2010 § 301(d).]
Practical Planning Pointer: The date of enactment is December 17, 2010, so the due
date is extended to September 17, 2011, which falls on a Saturday, so the due date
of estate tax returns for 2010 decedents is no earlier than September 19, 2011.
(2) Carryover Basis Report. Under current law, the carryover basis report under §
6018 is required to be filed with the decedent’s final income tax return. I.R.C. §
6075(a). The due date for filing this report may also be deferred to nine months
after the date of enactment. [TRA 2010 § 301(d)(1)(A).] EGTRRA amended I.R.C.
§ 6018 for decedents dying after 2009 to refer to a carryover basis information
return instead of the estate tax return (because the estate tax does not apply under
EGTRRA to decedents dying after 2009). That amendment to § 6018 (and the
change to § 6075(a) regarding the due date of the carryover basis report) were in
subtitle E of title V of EGTRRA, and TRA 2010 § 301(a) interprets the Code as if
subtitle E had never been enacted. Therefore, the default rule under TRA 2010 is
that § 6018 now refers to the estate tax return, not the carryover basis information
report. However, if the carryover basis election is made, the amendment in §301(a)
does not apply as to the estate tax or carryover basis, so § 6018 continues to refer
to the carryover basis report and not the estate tax return and § 6075(a) continues
to require that the report be filed with the decedent’s final income tax return.
Section 301(d)(1) of TRA 2010 is titled “Estate Tax,” but § 301(d)(1)(A) refers to
the date for filing “any return under section 6018.” If the carryover basis election
is made, § 6018 addresses the carryover basis information report and not the estate
tax return. Therefore, this provision in § 301(d)(1)(A) appears to override I.R.C. §
6075 and change the due date to no earlier than nine months after the date of
enactment.
The IRS issued a draft of Form 8939 for comments on December 16, 2010.
The draft form does not include instructions. The draft form does not contain any
election provision (in light of the fact that the draft was prepared before TRA 2010
was enacted providing for the election). The form contemplates that the specific
assets passing to each distributee (together with the carryover basis, value, holding
period and basis adjustment allocation for each asset) will be listed on the form.
(The form does not address what will happen if the executor has not paid all debts
and expenses, paid all taxes and made final distributions of the assets to the
beneficiaries by the time the form is due. Until all of that has happened, the
executor cannot know what specific assets will pass to beneficiaries.)
(3) Disclaimers. The time for making any disclaimer under I.R.C. § 2518(b) for
property passing by reason of the death of a decedent (who dies after 2009) is
extended to nine months after the date of enactment. [TRA § 301(d)(1)(C).] (The
Baucus bill applied the disclaimer extension, as well as the other extensions, only
for 2010 decedents who die before the date of enactment and referred to an
extension before the time of “receiving” a disclaimer rather than the time for

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“making” a disclaimer.) This opens up additional planning flexibility, in light of
the dramatic change in estate tax treatment under TRA 2010. Concerns with
being able to take advantage of this additional time include (1) that beneficiaries
may have already accepted benefits, not realizing that the disclaimer period would
be extended, and (2) state law requirements for disclaimers often refer to nine
months after the transfer, so disclaimers during the extended time period may not
satisfy the state law requirements. (Query whether states will respond by amending
their disclaimer statutes for decedents dying in 2010 before the date of enactment?
Keep in mind that I.R.C. § 2518(c)(3) provides that transfers that do not qualify as
disclaimers under local law may still constitute a qualified disclaimer under federal
law, as long as the disclaimer operates as a valid transfer under local law to the
persons who would have received the property had it been a qualified disclaimer
under local law.
Practical Planning Pointer: Recite in the deed or other transfer document that the
transfer is intended as a qualified disclaimer for federal tax purposes and that the
assets are passing to the same persons who would have received the property had
the transferor made a valid disclaimer.
Extended Due Date: The extended disclaimer period runs until September 17,
2011 for 2010 decedents who die before December 17, 2010. (For decedents who
die after December 17, the 9-month period will run as usual, which will be
sometime after September 17, 2011.)
(4) GST Tax Returns. The date for filing any return under I.R.C. § 2662 to report a
“generation-skipping transfer” transfer in 2010 before the date of enactment
(December 17) is extended to no earlier than 9 months after the date of enactment
(or December 17, 2011, which is a Saturday, so the extended due date would be no
earlier than September 19, 2011). [TRA § 301(d)(2).]
Practical Impact: For generation skipping transfers (i.e., direct skips, taxable
distributions or taxable terminations), the due date for reporting the transaction on
an appropriate return is extended to no earlier than September 17, 2010. (The
GST transfer would be reported on the form, but the GST tax rate would be zero.
Query whether there is any penalty for failing to file the return on time if the
penalty is based on the amount of unpaid tax?) The time for filing a timely return
to make a timely allocation of GST exemption or to make a timely election out of
automatic allocation to a direct skip would be extended to September 17, 2011.
(For a lifetime direct skip that would be reported on a gift tax return, if the income
tax return is extended, the extended due date (October 17, 2011) would be past
the September 17 date in any event.)
Practical Planning Pointer: While the time to file GST returns to report “generation-
skipping transfers” that occur before December 17 in 2010 is extended, there does
not appear to be an extension of time for filing a return to make timely allocations
of GST exemption (or elect out of automatic allocations) for “indirect skip”
transfers to trusts that are not direct skips.
(5) Applicable for Estates of Decedents Dying in 2010 Before Date of Enactment. The
extension period for filing returns and paying taxes and for making disclaimers
applies to estates of decedents dying in 2010 and before the date of enactment
(December 17, 2010). Similarly, the extended due dates for GST returns applies for

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a generation-skipping transfers made in 2010 before the date of enactment. [TRA
2010 § 301(d).]
(3) Portability. The executor of a deceased spouse’s estate may transfer any unused estate exemption
to the surviving spouse. [TRA 2010 § 303.]
a. Estate Tax Exclusion Amount Definition Change. The portability concept is accomplished
by amending I.R.C. § 2010(c) to provide that the estate tax applicable exclusion amount is
(1) the “basic exclusion amount” ($5.0 million, indexed from 2010 beginning in 2012),
plus (2) for a surviving spouse, the “deceased spousal unused exclusion amount.” [I.R.C. §
2010(c)(2), as amended by TRA § 302(a).]
b. Deceased Spousal Unused Exclusion Amount. The “deceased spousal unused exclusion
amount” is the lesser of (1) the basic exclusion amount or (2) the basic exclusion amount
of the surviving spouse’s last deceased spouse over the combined amount of the deceased
spouse’s taxable estate plus adjusted taxable gifts (described in new § 2010(c)((4)(B)(ii) as
“the amount with respect to which the tentative tax is determined under I.R.C. §
2001(b)(1)”).
The first item limits the unused exclusion to the amount of the basic exclusion amount.
Therefore, if the estate tax exclusion amount decreases by the time of the surviving
spouse’s death, the lower basic exclusion amount would be the limit on the unused
exclusion of the predeceased spouse that could be used by the surviving spouse.
The second item is the last deceased spouse’s remaining unused exemption amount.
Observe that it is strictly defined as the predeceased spouse’s basic exclusion amount less
the combined amount of taxable estate plus adjusted taxable gifts of the predeceased
spouse. This appears to impose a privity requirement (discussed below in Item 3f).
c. Statute of Limitations on Review of Predeceased Spouse’s Estate to Determine Unused
Exclusion Amount. Notwithstanding the statute of limitations on assessing estate or gift
taxes for the predeceased spouse, the IRS may examine the return of a predeceased spouse
at any time for purposes of determining the deceased spousal unused exclusion amount
available for use by the surviving spouse. I.R.C. § 2010(c)(5)(B), as amended by TRA
2010 § 303(a).
d. Must be Timely Filed Estate Tax Return and Election for Predeceased Spouse’s Estate. The
Act continues the position of prior portability bills that the executor of the first spouse’s
estate must file an estate tax return on a timely basis and make an election to permit the
surviving spouse to utilize the unused exemption. (Therefore, even small estates of married
persons must consider whether to file an estate tax return for the first deceased spouse’s
estate.)
e. Only Last Deceased Spouse’s Unused Exclusion Amount Applies. Only the most recent
deceased spouse’s unused exemption may be used by the surviving spouse (this is different
from prior portability legislative proposals). I.R.C. § 2010(c)(5)(B)(i), as amended. An
explanation of TRA 2010 by the Joint Committee on Taxation reiterates that this
requirement applies even if the last deceased spouse has no unused exclusion and even if
the last deceased spouse does not make a timely election. Joint Committee on Taxation
Technical Explanation of the Revenue Provisions Contained in the “Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010” Scheduled for
Consideration by the United State Senate, 52 n.57 (Dec. 10, 2010)[hereinafter Joint
Committee on Taxation Technical Explanation].

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f. Privity Requirement. A spouse may not use his or her spouse’s “deceased spousal unused
exclusion amount.” This is sometimes referred to as the “privity” requirement. For
example, assume H1 dies and W has his deceased spousal unused exclusion amount, and
assume W remarries H2. If W dies before H2, H2 may then use the deceased spousal
unused exclusion amount from W’s unused basic exclusion amount, but may not utilize
any of H1s unused exclusion amount. The definition of the “deceased spousal unused
exclusion amount” has no element at all that might include a deceased person’s unused
exclusion from a prior spouse in determining how much unused exclusion can be used by
a surviving spouse. However, the Joint Committee on Taxation Technical Explanation
has an Example that appears inconsistent with this conclusion.
“Example 3. [Husband 1 dies with $2 million of unused exclusion amount.]
Following Husband 1’s death, Wife’s applicable exclusion amount is $7 million
(her $5 million basic exclusion amount plus $2 million deceased spousal unused
exclusion amount from Husband 1). Wife made no taxable transfers and has a
taxable estate of $3 million. An election is made on Wife’s estate tax return to
permit Husband 2 to use Wife’s deceased spousal unused exclusion amount, which
is $4 million (Wife’s $7 million applicable exclusion amount less her $3 million
taxable estate). Under the provision, Husband 2’s applicable exclusion amount is
increased by $4 million, i.e., the amount of deceased spousal unused exclusion
amount of Wife.” Joint Committee on Taxation Technical Explanation at 53.
This example assumes that Wife’s deceased spouse unused exclusion amount, which could
be used by Husband 2, is Wife’s $7 million exclusion amount (which includes the deceased
spousal unused exclusion from Husband 1) less her $3 million taxable estate. This would
suggest that Husband 2 does get to take advantage of the unused exclusion amount from
Husband 1. One might argue that this is just a matter of determining whether Wife first
uses her own exclusion or first uses Husband 1’s unused exclusion before using her own.
If she first uses the unused exclusion that she received from Husband 1, her $3 million
taxable estate, less Husband’s 1’s $2 million exclusion, would leave $1 million of taxable
estate to be offset by $1 million of Wife’s basic exclusion, leaving unused exclusion of $4
million for Husband 2. However, that approach is not consistent with the statutory
definition of the “deceased spousal unused exclusion amount.” Under the statutory
definition, the deceased spousal unused exclusion amount that Husband 2 could have
from Wife is determined as follows:
Lesser of:
(1) Basic exclusion amount $5 million
Or
(2) Wife’s basic exclusion amount $5 million
Less
Wife’s taxable estate plus adjusted taxable gifts $3 million
Item (2) $2 million

There is nothing in the statutory definition that makes any references whatsoever to the
amount of Wife’s unused exclusion from Husband 1 in determining the amount of the
unused exclusion that Husband 2 has from Wife.
g. Applies for Gift Tax Purposes. Portability applies for the gift exemption as well as the
estate exemption. TRA 2010 § 303(b)(1) amends I.R.C. § 2505(a)(1), which describes the

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“applicable credit amount” for gift tax purposes, by referring to the applicable credit
amount under § 2010(c) “which would apply if the donor died as of the end of the
calendar year…” (Under § 2505(a)(2), the credit amount is further reduced by the
amounts of credit allowable in preceding years.) The applicable credit amount under §
2010(c) includes the deceased spousal unused exclusion amount, so that amount is also
included in the gift exemption amount.
Example 1. Husband 1 dies in 2011 with a taxable estate of $1 million, leaving a
“deceased spousal unused credit amount” for Wife of $4 million. If later in 2011
Wife makes a large gift, her gift exemption under § 2505(a) is the estate tax
applicable credit amount under § 2010(c) that would apply if Wife died as of the
end of 2011. If Wife died at the end of 2011, her estate tax applicable credit
amount would be her basic exclusion amount ($5 million) plus the amount of her
deceased spousal unused credit amount ($4 million), or $9 million.
Example 2 (Gift in 2011). Assume the same facts as Example 1, but assume Wife
makes a taxable gift of $4 million in 2011. (Apparently, it makes no difference
whether Wife makes the gift before or after Husband 1 dies—her gift exemption is
determined as if she had died on the last day of the calendar year, which would be
after Husband 1 died.) Does the 2011 gift utilize Wife’s own gift exemption
amount first, or does it utilize her deceased spousal unused exclusion amount from
Husband 1 first? Example 3 in the Joint Committee on Taxation Technical
Explanation might be read as saying that the deceased spousal unused credit would
be used first (at least for estate tax purposes). However, there is nothing in the
statutory language suggesting that either spouse’s credit would be used first. It just
says that Wife has a credit on $9 million of exclusion in 2011 (or $3,130,800 of
credit). Her gift of $4 million generates no gift tax:
Gift tax on $4 million $1,380,800
Less gift unified credit - 1,380,800
Gift tax paid 0
Example 3 (Additional Gift in 2012). Assume the same facts as in Examples 1-2,
assume Wife makes another taxable gift of $4 million in 2012, and assume there is
no inflation adjustment to the $5 million basic exclusion amount. (If there had
been an inflation adjustment, Wife’s basic exclusion amount would be inflation
adjusted, but the $4 million of deceased spousal unused exclusion would not be
adjusted.) Wife’s gift unified credit is (1) the estate tax applicable credit amount
she would have if she died at the end of 2012 [§ 2505(a)(1)], less (2) the amounts
allowable as credit against the gift tax for preceding years [§ 2505(a)(2)]. This
amount is:
(1) Estate tax applicable credit amount if die at end of 2012
(tentative tax on basic exclusion amount ($5 million assuming
no inflation adjustment) and deceased spousal unused
exclusion amount ($4 million, never inflation adjusted),
combined $9 million) $3,130,800
Less (2) Amounts allowable as credit for preceding years - 1,380,800
Available gift tax unified credit amount for 2012 1,750,000

Bessemer Trust 10

Gift tax calculation:
Gift tax on gifts for all periods ($8 million) $2,780,800
Gift tax on $4 million gifts in 2011 - 1,380,800
Gift tax before credit 1,400,000
Gift tax paid 0

Available gift tax unified credit available for future years (as long as Wife has this
same deceased spousal unused exclusion amount):
Credit amount on $9 million $3,130,800
Gift credit used in 2011 - 1,380,800
Gift credit used in 2012 - 1,400,000
Remaining gift credit 350,000

(That would cover additional gifts of $1 million.)
Example 4 (Husband 2 Dies, Additional Gift in 2013). Assume the same facts as
in Examples 1-3, assume Husband 2 dies in 2013 with a taxable estate of $6
million and no unused exclusion amount, assume TRA 2010 is extended to apply
in 2013, and assume the estate tax basic exclusion amount has been inflation
adjusted to $5,020,000. Assume Wife makes a gift of $1 million in 2013.

Wife’s gift tax unified credit:
(1) Estate tax applicable credit amount if die at end of 2013
(tentative tax on basic exclusion amount ($5.02 million)
and deceased spousal unused exclusion amount (0),
combined $5.02 million $1,737,800
Less
(2) Amounts allowable as credit for preceding years
(1,380,800 for 2011 + 1,400,000 for 2012) - 2,780,800
Remaining gift credit 0

Gift tax calculation:
Gift tax on gifts for all periods ($9 million) $3,130,800
Gift tax on $8 million gifts in 2011-2012 - 2,780,000
Gift tax before credit 350,000
Less gift unified credit - 0
Gift tax paid 350,000

Practical Planning Pointers.
(a) There is no concept of “using Husband 1’s unused exclusion first,” leaving
Wife with $1.0 million of her own gift exemption amount after Husband 2
died, and Wife no longer had any deceased spousal unused exclusion after
Husband 2 died.

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(b) A surviving spouse should use the deceased spouse’s unused exclusion
amount with gifts as soon as possible (particularly if she remarries) so that
she does not lose it if the new spouse predeceases or if the basic exclusion
amount is decreased (remember that the deceased unused exclusion amount
is the lesser of the basic exclusion amount or the amount from the unused
exclusion calculation).
(c) There is no way that Wife can utilize her deceased spousal unused
exclusion amount with out using her own basic exclusion amount.
h. Not Apply for GST Tax Purposes. Portability does not apply to the GST exemption.
i. Effective Date — Decedents Dying After 2010. The provision applies to the estates of
decedents dying and gifts made after 2010. [TRA § 303(c)(1).] The Joint Committee on
Taxation Technical Explanation takes the clear position that portability applies only if the
first spouse dies after 2010. Joint Committee on Taxation Technical Explanation, at 51-
52 (“Under the provision, any applicable exclusion amount that remains unused as of the
death of a spouse who dies after December 31, 2010 (the ‘deceased spousal unused
exclusion amount’), generally is available for use by the surviving spouse, as an addition to
such surviving spouse’s applicable exclusion amount.”)
j. Planning Observations.
(i) Heightened Significance in Light of Exemption Amount Increase. Portability takes
on increased importance in light of the increase of the exemption amount to $5.0
million. Marrying a poor dying person to be able to use his or her unused
exemption amount (which could be close to the full $5.0 million) may yield
dramatic tax savings.
(ii) Impact on Decision to Remarry. Portability may impact the decision of a surviving
spouse to remarry. If the new spouse should predecease the surviving spouse, the
unused exemption of the first deceased spouse would no longer be available to the
surviving spouse, and the new spouse may have little or no unused exemption.
(iii) Impact of Decision to Divorce. Portability could even encourage the spouses of
wealthy families to divorce, each to remarry poor sickly individuals, and not to
remarry after the new poor spouses die. This could make up to an additional $10
million of estate and gift tax exemption available to the family.
(iv) Gift Tax Exclusions of Multiple Deceased Spouses. The statute itself has no limits
on being able to take advantage of the exemptions from multiple deceased spouses
for gift tax purposes. For example, if H1 dies with substantial unused exclusion,
the surviving spouse (W) could make lifetime gifts using her own exclusion and
H1s unused exclusion. (As discussed above, Wife would have to use her own basic
exclusion amount in order to use the deceased spousal unused exclusion amount
from H1.)) If Wife remarries and H2 also dies with unused exclusion, W could
then make additional gifts using H2’s unused exclusion (before she remarries and
her next husband dies). Courts or the IRS may address a “sham marriage” concept
to put some limits on using the exclusions of multiple poor sickly spouses.
Only Available Two Years. Like the rest of the estate and gift tax provisions in
TRA 2010, the portability provision expires after 2012. The apparent anticipation
is that Congress will extend this benefit following 2012, but there are no
guarantees. In light of this, few will be willing to rely on portability and forego

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using bypass trust planning in the first deceased spouse’s will. The possible
exception would be if the surviving spouse intends to make gifts soon after the first
spouse’s death to utilize the unused exclusion — but if the spouse is willing to do
that, it would seem better to just use bypass trust planning in the spouses’ wills.
(vi) Reasons for Using Trusts Even With Portability. There are various reasons for
continuing to use bypass trusts at the first spouse’s death and not rely on the
portability provision including, (a) the deceased spousal unused exclusion amount
is not indexed, (b) the unused exclusion from a particular predeceased spouse will
be lost if the surviving spouse remarries and survives his or her next spouse, (c)
growth in the assets are not excluded from the gross estate of the surviving spouse
unlike the growth in a bypass trust which is excluded, (d) there is no portability of
the GST exemption, and (e) there are other standard benefits of trusts, including
asset protection, providing management, and restricting transfers of assets by the
surviving spouse. On the other hand, leaving everything to the surviving spouse
and relying on portability offers the advantages of simplicity and a stepped-up
basis at the surviving spouse’s death.
Practical Planning Pointer: Few individuals will be willing to rely on portability of
the estate tax exemption in planning their estates, because of the fact that
portability only exists for two years and because there are a variety of other
reasons for continuing to use appropriate “bypass” planning with trusts.
(4) Gift Exemption and Change in Method for Calculating Gift Tax.
a. Unification of Gift Exemption Beginning in 2011. The gift exemption remains at
$1,000,000 in 2010. [TRA § 302(b)(1)(B).] Beginning in 2011, the gift exemption amount
is the same as the estate tax exclusion amount, or $5.0 million, indexed from 2010
beginning in 2012. Following amendments to I.R.C. § 2505(a) in TRA 2010 §§ 301(b) &
302(b)(1), § 2505(a)(1) will provide that the unified gift tax credit is:
“(1) the applicable credit amount in effect under section 2010(c) which would apply if the
donor died as of the end of the calendar year …”
(The last phrase, beginning with “which would apply if the donor died as of the end of the
calendar year” is the clause that provides portability of the gift exclusion.)
The Baucus bill did not unify the gift and estate exclusion amounts.
Practical Planning Pointer--Huge Implications for Future Transfer Planning Opportunities: The
$5.0 million gift exclusion amount beginning in 2011 will open up a new paradigm of
thinking regarding transfer planning strategies. The ability to make transfers of up to $10
million per couple without having to pay gift taxes paves the way for many transfer
planning opportunities that, with leveraging strategies, can transfer vast amounts of
wealth outside the gross estate. For example, a couple could give $10 million to grantor
trusts, and sell $90 million of assets to the trusts with extremely low interest rate notes.
The couple would continue to pay all of the income taxes on the grantor trusts, further
depleting their estates and allowing the trusts to compound tax-free. Perhaps the notion of
the estate tax being a “voluntary tax” will become reality.
b. Change in Gift Tax Calculation Method; Effect of Changed Calculation Method. For gift
tax purposes, the gift tax calculation includes subtracting a unified credit, and the amount
of unified credit available for a particular year is determined after subtracting the amount
of credit already used from prior gifts. In calculating the amount of credit used on prior

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gifts, use the gift tax rate for the year of the current gift to determine the tentative tax on
the applicable exclusion amount that was applicable for offsetting the gift tax on prior
gifts. [TRA § 302(d)(2), amending I.R.C. § 2505(a).] (Query how to apply the rates in the
current year for purposes of subtracting the gift credit amounts used in prior years when
gifts were made in years before 1998 for which there was a fixed credit amount rather
than an applicable exclusion amount? For example, in 1987-1997, the unified credit
against gift tax was $192,800. For those years, presumably, the actual amount of gift
credit used in the prior year is subtracted under § 2505(a)(2).)
The effect of this change is to “correct” an anomaly that existed under prior law. If an
individual had made gifts before 2010 over $500,000, the gifts used more credit
(calculated at 37% and 39% rates) than gifts would use at a 35% rate. The result was
that donors who had made prior taxable gifts over $500,000 could not make additional
gifts in 2010 (at a 35% rate) equal to the difference between $1 million and the prior gifts.
(For example, a donor who had made taxable gifts before 2010 of $961,538.46 would not
be able to make additional gifts in 2010 (calculating the credit at a 35% rate) without
paying gift tax.)
Practical Planning Pointer: The amendments to § 2505 mean that a donor can make gifts
equal to the difference between the current applicable exclusion amount for gift tax
purposes and the amount of prior taxable gifts without having to pay gift tax.
Steven Schindler, attorney in Seattle Washington, provides this example of the effect of the
amendments to § 2505(a):
“For example, a donor who, in 2009, made her first taxable gift in the amount of
$900,000, utilized $306,800 in credit (when $345,800 was available). The same
donor in 2010 only has $330,800 in total credit, and, having used $306,800 in
2009, only has $24,000 in remaining credit to apply against 2010 gifts. At the
35% gift tax rate, this amount of credit only protects $68,571 in taxable gifts. If
the donor makes a gift of the remaining $100,000, thinking that she has $1 million
in total lifetime exemption equivalent, the donor would owe gift tax of $11,000
under the unamended § 2505(a).
Under TRA 2010 § 302(d)(2) we would not look to the 2009 return to determine
how much credit was used. Instead, we would re-determine in 2010, for purposes
of calculating gift tax on any 2010 gift, the amount of credit that would have been
used on the 2009 gift if the tax rates in effect in 2010 were applicable in 2009.
Applying the maximum 35% rate to the $900,000 gift, only $295,800 in credit
would have been used, leaving $35,000 in remaining credit for 2010, permitting a
full $100,000 gift.”
c. Gift Tax Effects if Donor Previously Made Gifts Above $5 Million in Prior Years. If a
donor has made over $5 million of gifts in prior years, can the donor make use of the
additional $4 million of gift exemption in 2011? Yes. The donor paid gift taxes on the
excess of gifts over the $1 million exemption (or less) in prior years, and the donor can
still take advantage of the additional $4 million of gift exemption. Under § 2505(a), the
donor’s gift tax unified credit amount would be the applicable credit amount on the $5
million basic exclusion less the “amounts allowable as a credit to the individual under this
section for all preceding calendar periods” (which would reflect the credit amount on $1
million of gifts, so there would be lots of unified credit left).

Bessemer Trust 14

Example ($5 million of Gifts in 2009). Assume Donor made $5 million of taxable gifts in
2009, and wishes to make an additional $4 million of gifts in 2011 (to make use of her
additional $4 million of gift exemption.)

Gift tax in 2009 on $5 million gift:
Gift tax before credit (applying 45% rate) $2,130,800
Gift tax credit on $1.0 million - 345,800
Gift tax paid for 2009 gifts 1,785,000

Gift tax in 2011 on additional $4 million gift:
Gift tax on aggregate gifts of $9 million
(applying 35% rate), § 2502(a)(1)(a) $3,130,800
Less gift tax on prior $5 million gift
(also applying 35% rate), § 2502(a)(1)(b) - 1,730,800
Gift tax before credit 1,400,000
Less available gift unified credit (using 35% rate, even
for determining amount of credit used in 2009 when the
marginal rate was 45%, under § 2505(a), as amended by
TRA 2010 § 302(d)(2))
(1) Estate tax applicable credit amount on $5 million basic
exclusion amount in 2011, § 2505(a)(1) $1,730,800
Less
(2) Amounts allowable as credit for preceding years (on $1
million), using 35% highest marginal rate that applies in
current year, rather than 39% highest rate that applied in
2009) - 330,800
Available gift credit for 2011 $1,400,000
Gift tax for 2011 after credit
Gift tax before credit (calculated above) $1,400,000
Gift tax payable for 2011 0

Practical Planning Pointer: If a donor previously made taxable gifts exceeding $1 million
prior to 2011, the donor can make additional gifts of exactly $4,000,000 that will be
covered by the $5 million gift exemption in 2011. Even though the gift credit on up to $1
million was previously calculated using 45% (or higher rates), in the current year
calculation the amount of credit previously used is calculated using current year (35%
rates) rather than the amount of credit actually applied at the higher rates.
d. Gift Tax Effects if Donor Previously Made Taxable Gifts Above $1 Million Prior to 2011.
As illustrated by the preceding example, if the donor has previously made taxable gifts of
at least $1 million prior to 2011, the client can make an additional taxable gift of exactly
$4 million in 2011 without having to pay gift tax.
e. Gift Tax Effects if Donor Previously Made Taxable Gifts, But Under $1 Million Prior to
2011. Similarly, if the donor has made prior taxable gifts prior to 2011 of less than $1
million, the donor can make gifts of exactly $5 million less the amount of taxable gift
made previously.
Example ($900,000 of Prior Gifts). Assume the donor made gifts of $900,000 in 2009.

Bessemer Trust 15

Gift tax in 2009 on $900,000 gift:
Gift tax before credit (highest marginal rate is 39%) $ 306,800
Gift tax credit on $900,000 - 306,800
Gift tax paid for 2009 gifts 0

Gift tax in 2011 on additional $4.1 million gift:
Gift tax on aggregate gifts of $5 million
(applying 35% rate), § 2502(a)(1)(a) $1,730,800
Less gift tax on prior $900,000 gift
(also applying 35% rate), § 2502(a)(1)(b) - 295,800
Gift tax on additional $4.1 million before credit 1,435,000

Credit on 2011 gift
Credit on $5.0 million applicable exclusion $1,730,800
Credit used on prior period gifts (35% rate) - 295,800
Credit left $1,435,000
Gift tax payable on 2011 gift $ 0

(5) Change in Estate Tax Calculation Method Regarding Effects of Prior Gifts. The estate tax
calculation method is changed to reflect the effects of changing gift tax rates. The calculation
method under § 2001(b) is to calculate the estate tax amount, before applying the unified credit or
other credits, by the following approach:
• First, calculate a tentative tax on the combined amount of (A) the taxable estate, and (B) the
amount of adjusted taxable gifts (i.e., taxable gifts made after 1976 other than gifts that have
been brought back into the gross estate — just the tax using the rate schedule is calculated,
without subtracting any credits), I.R.C. § 2001(b)(1),
• Second, subtract the amount of gift tax that would have been payable with respect to gifts
after 1976 if the rate schedule in effect at the decedent’s death had been applicable at the time
of the gifts (the Form 706 instructions for the “Line 7 Worksheet” clarify that the gift unified
credit attributable to the applicable credit amount available in each year that gifts were made
is used in calculating the gift tax that would have been payable in that year), I.R.C. §
2001(b)(2).
TRA 2010 amends § 2001 to add new § 2001(g), which clarifies that in making the second
calculation (under § 2001(b)(2)), the tax rates in effect at the date of death (rather than the rates
at the time of each gift) are used to compute the gift tax imposed and the gift unified credit
allowed in each year. The gift unified credit equals--
(1) the estate tax applicable credit amount for the year of the gift (§ 2505(a)(1)), less
(2) the aggregate gift unified credits for preceding years (§ 2505(a)(2)), and as discussed in Item 4
b above regarding the calculation of the gift tax, TRA 2010 amends § 2505(a) to provide that in
calculating the aggregate gift unified credits used in prior years under § 2505(a)(2), rates in effect
for the year of each current gift are used in lieu of the actual rates of tax in effect during the
preceding years.
a. General Estate Tax Effects of Prior Gifts. Generally speaking, the estate tax calculation
method of § 2001(b) is designed (1) to tax the estate at the highest estate tax rate brackets,

Bessemer Trust 16

taking into consideration prior gifts (by determining the tax on the combined taxable
estate plus adjusted taxable gifts and subtracting the taxes on just the adjusted taxable
gifts), and (2) to reflect that the individual has already utilized unified credit that would
otherwise be available at death for any taxable gifts made previously (this is done by
reducing the amount of tax that is subtracted attributable to just the adjusted taxable gifts
by the amount of unified credits attributable to those adjusted taxable gifts.)
Practical Planning Pointer: By using the rates in effect at the date of death to calculate the
gifts tax that would have been payable on the adjusted taxable gifts, the system grants an
advantage to making gifts at a lower rate than the ultimate estate tax rate.
b. Impact of Gifts Utilizing $5 Gift Exemption on Later Estate Tax Calculation.
Example 1 (Gift of $5 Million; Death in 2012). Assume A has an estate of $15 million
and makes a $5 million gift (ATG) in 2011, and dies in 2012 with a taxable estate (TE) of
$10 million. (Because death occurs within three years, any gift tax paid would be brought
back into the estate, but a gift of $5 million in 2011 will not require the payment of any
gift tax.)
Gift Calculation. The gift is fully covered by the $5 million gift exemption, so no gift tax
is due.

Estate Tax Calculation
(1) Tentative tax on TE + ATG ($15 million) $5,230,800
(2) Less gift tax on ATGs using date of death rates
Gift tax on $5 million (35% top rate) 1,730,800
Less gift unified credit on $5M exclusion (35% rate) - 1,730,800
- 0
(3) Estate tax before unified credit 5,230,800
(4) Less unified credit on $5 million exclusion - 1,730,800
(5) Estate tax 3,500,000

Conclusion. The total gift tax and estate tax is $3,500,000. If the gift had not been made,
the estate tax on a $15 million taxable estate would have been the same $3,500,000.
Making the gift did not cost any additional tax. The simple example neglects future
appreciation and payments of income taxes. If the gift removed future appreciation or if
the gift were made to a grantor trust and A paid income taxes on grantor trust income
thus reducing her estate, the gift would have produced an overall savings — without
having to pay a current gift tax.
Example 2 (Gift of $5 Million; Death in 2013 and Assume Applicable Exclusion Amount
Has Been Reduced to $3.5 Million and Rate Has Been Increased to 45%). Assume A
makes a $5 million gift in 2011 and dies in 2013 after TRA 2010 has sunsetted. Assume
the law is changed for 2013 so that the applicable exclusion amount is reduced to $3.5
million and the rate is increased to 45% (the 2009 system).
Gift Calculation. The gift is fully covered by the $5 million gift exemption, so no gift tax is
due.

Bessemer Trust 17

(1) Tentative tax on TE + ATG ($15 million) (45% top rate) $6,630,800
- 0
(4) Less unified credit on $3.5 million exclusion - 1,455,800
(5) Estate tax 5,175,000

Making the gift did not cost any additional tax, even if TRA sunsets and there is a later
decrease in the applicable exclusion amount and increase in the gift tax rate. Stated
differently, the estate ultimately receives just the benefit of the applicable exclusion
amount at the individual’s death. However, future appreciation attributable to the gift or
income taxes paid on gift assets in grantor trusts will reduce the gross estate that would
otherwise be subject to estate taxes.
Example 3 (Gift of $5 Million; Death in 2013 and Assume Applicable Exclusion Amount
Has Been Reduced to $1 Million and Rate Has Been Increased to 55%). Assume A makes
a $5 million gift in 2011 and dies in 2013 after TRA 2010 has sunsetted. Assume the law
is changed for 2013 so that the applicable exclusion amount is reduced to $1 million and
the rate is increased to 55% (the pre-2001 system).
Gift Calculation. The gift is fully covered by the $5 million gift exemption, so no gift tax is
due.

(1) Tentative tax on TE + ATG ($15 million) (55% top rate) $7,890,800
- 0
(4) Less unified credit on $1 million exclusion - 345,800
(5) Estate tax 7,545,000

Making the gift did not cost any additional tax, even if TRA sunsets and there is a later
dramatic decrease in the applicable exclusion amount and increase in the gift tax rate. The
simple example neglects future appreciation and payments of income taxes. If the gift
removed future appreciation or if the gift were made to a grantor trust and A paid income
taxes on grantor trust income thus reducing her estate, the gift would have produced an
overall savings — without having to pay a current gift tax.

Bessemer Trust 18

Practical Planning Pointer: Making a taxable gift merely has the effect of excluding future
appreciation of the gift property from the estate as well as income tax that the donor may
pay on grantor trust income if the gift is made to a grantor trust. The estate ultimately
receives just the benefit of the applicable exclusion amount at the individual’s death. As
illustrated in this example, if an individual makes a $5 million gift in 2011 and the
applicable exclusion amount is later reduced, the individual still has the benefit of making
a $5 million gift (and shifting future appreciation and income payments attributable to a
grantor trust) without taking away the estate’s right to take advantage of the applicable
exclusion amount at death, whatever amount that might be. If the donor has not paid
gifts taxes, the effect is that the estate is subject to estate tax (using rates in effect at the
date of death) on the combined taxable estate plus adjusted taxable gifts, with the benefit
of the unified credit that applies at the date of death. (The next examples address the
effects if gift taxes have been paid during life.)
Example 4 (Gift of $10 million in 2011; Death in 2012 With Same Exclusion and Rate).
Assume A makes a gift of $10 million in 2011 and dies in 2012 with a taxable estate of $5
million (including the gift tax paid, which is added to the gross estate because A did not
live three years after making the gift).

Gift Calculation
Gift tax (before credit) on $10 million $3,480,800
Less unified credit on $5 million exclusion amount - 1,730,800
Gift tax payable for 2011 gift 1,750,000

(1) Tentative tax on TE (incl Gift Tax) + ATG ($15 million) $5,230,800
- 1,750,000
(4) Less unified credit on $5 million exclusion - 1,730,800
(5) Estate tax 1,750,000

Conclusion. The total gift tax and estate tax is $1,750,000 gift tax plus $1,750,000 estate
tax, or $3,500,000. If the gift had not been made, the estate tax on a $15 million taxable
estate would have been the same $3,500,000. Making the gift did not cost any additional
tax. The simple example neglects future appreciation and payments of income taxes. If the
gift removed future appreciation or if the gift were made to a grantor trust and A paid
income taxes on grantor trust income thus reducing her estate, the gift would have
produced an overall savings.
Example 5 (Gift of $10 million in 2011; Death in 2013 With Exclusion of $3.5 Million
and Top Rate of 45%). Assume A makes a gift of $10 million in 2011 and dies in 2013
with a taxable estate of $5 million (including the gift tax paid, which is added to the gross
estate because A did not live three years after making the gift). Assume that Congress has
changed the applicable exclusion amount back to $3.5 million and has increased the top
rate to 45% for 2013.

Bessemer Trust 19

Gift Calculation
Less unified credit on $5 million exclusion amt - 1,730,800

(1) Tentative tax on TE (incl Gift Tax) + ATG ($15 million)
(at 45% top rate) $6,630,800
- 2,250,000
(4) Less unified credit on $3.5 million exclusion (45% top
rate) - 1,455,800
(5) Estate tax 2,925,000

estate would have been 5,175,000. Making the gift saved $500,000 of combined tax.
(The $10 million gift had a 35% tax rate apply to $5 million — the amount of the gift not
covered by the $5 million exemption. If the gift is not made, that $5 million would have
been taxed at 45%. The additional 10% of the $5 million amount accounts for the
additional $500,000 that would be paid if the gift were not made.)
Example 6 (Gift of $10 million in 2011; Death in 2013 With Exclusion of $1 Million
and Top Rate of 55%). Assume A makes a gift of $10 million in 2011 and dies in 2013
with a taxable estate of $5 million (including the gift tax paid, which is added to the gross
estate because A did not live three years after making the gift). Assume that Congress has
changed the applicable exclusion amount back to $1 million and has increased the top rate
to 55% for 2013.

Gift Calculation

(1) Tentative tax on TE (incl Gift Tax) + ATG ($15 million) (at
55% top rate) $7,890,800
(2) Less gift tax on ATGs using DOD rates
- 2,750,000
(4) Less unified credit on $1 million exclusion
(using 55% top rate) - 345,800

Bessemer Trust 20

(5) Estate tax 4,795,000

estate would have been 7,545,000. Making the gift saved $1 million of combined tax.
(The $10 million gift had a 35% tax rate apply to $5 million — the amount of the gift not
covered by the $5 million exemption. If the gift is not made, that $5 million would have
been taxed at 55%. The additional 20% of the $5 million amount accounts for the
additional $1 million that would be paid if the gift were not made.)
Practical Planning Pointer: As a general rule, if a gift over the $5 million exemption amount
is made and if the estate/gift tax rate is later increased, there will be savings equal to the
difference in rates times the excess gift over the gift exemption amount. A change in the
estate tax applicable exclusion amount alone does not result in a change of the combined
estate and gift tax. Also, this example is designed so that there is no benefit of savings
attributable to having gift taxes removed from the estate tax if the donor lives at least 3
years after the gift; this is on purpose to more readily compare the tax effects of making
gifts attributable to changing rates and exclusion amounts. However, the advantage of
having gift taxes removed from the estate is more pronounced as larger gift taxes are paid.
Furthermore, this simple example neglects future appreciation and payments of income
taxes. If the gift removed future appreciation or if the gift were made to a grantor trust
and A paid income taxes on grantor trust income thus reducing her estate, the gift would
have produced an even greater overall savings.
(5) GST Tax — Overview of Changes. The general GST effects of the amendments in TRA 2010 are
summarized below. A more detailed discussion of changes and planning implications is in the
subsequent GST Issues section of this summary.
a. GST Applicable Rate in 2010 is Zero. For all of 2010, the GST tax “applicable rate
determined under section 2641(a)... is zero” for all generation-skipping transfers made in
2010. [TRA 2010 § 302(c).] This change in nomenclature makes clear that generation-
skipping transfer may be made in further trust. This issue is discussed in Items 2a and 3 of
the GST Planning Issues section.
b. GST Tax Applies After 2010. TRA § 301(a) in effect repeals § 2664 added by EGTRRA,
which section provided that Chapter 13 would not apply to GST transfers after 2009.
This change is made effective for transfers made after 2009. However, as discussed
immediately above, TRA § 302(c) provides the special rule resulting in a zero GST tax for
GST transfers in 2010.
c. GST Exemption of $5.0 Million for 2010. The GST exemption equals the estate tax
“applicable exclusion amount under section 2010(c) for such calendar year.” I.R.C. §
2631(c). Because the estate tax applicable exclusion amount is changed to $5.0 million for
2010 (see item (1) above), [TRA § 302(a)(1)], the GST exemption is $5.0 million for 2010.
This is important, because it clarifies that there is up to $5.0 million of GST exemption
that can be allocated on a timely basis to transfers to trusts in 2010. (See Item 7 of the
GST Issues section of this summary for a more detailed discussion of the applicability of
the $5 million GST exemption in 2010 and planning implications in connection with that
exemption.)
d. GST Exemption in Future Years. The GST exemption for 2011 will also be $5.0 million.
The $5.0 million amount is indexed from 2010, beginning in 2012. (The GST exemption

Bessemer Trust 21

amount is the same as the estate tax applicable exclusion amount, and the estate tax
exclusion amount is indexed beginning in 2012 as discussed in Item 1 above.) If the GST
exemption amount is not changed by future legislation, after the TRA sunsets following
2012, the GST exemption will be $1.0 million, indexed from 1997.
e. GST Tax Rate After 2010. The “applicable rate” for determining the GST tax is the
maximum estate tax rate times the inclusion of the trust. I.R.C. § 2641(a). Because the
maximum estate tax rate is 35%, the GST rate is also 35% (except that the rate is zero for
generation-skipping transfers in 2010).
(6) Section 2511(c) Deleted. Section 2511(c), added by EGTRRA, provides that transfers to non-
grantor trusts are treated as gifts. That section, which has raised considerable confusion, is
fortunately deleted.
(7) Sunset Provision of EGTRRA. Planners have been very concerned about the unintended possible
effects of the sunset provision in EGTRRA following 2010. Section 901 of EGTRRA says that the
Code will be interpreted as if the provisions of EGTRRA had never been enacted with respect to
estates of decedents dying after, gift made after, and GST transfers after 2010. However, there are
many taxpayer favorable provisions in EGTRRA that might conceivably expire under EGTRRA §
901.
Most of these uncertainties are resolved for 2011 and 2012. TRA 2010 § 301(a) says that each
Code provision amended by subtitles A or E of title V of EGTRRA “is amended to read as such
provision would read if such subtitle had never been enacted.” Subtitle A contains I.R.C. § 2210,
which says that Chapter 11 [containing the estate tax provisions] does not apply to decedents
dying after 2009 (except as to certain distributions from QDOTs) and I.R.C. § 2664 (which says
that Chapter 13 does not apply to GST transfers after 2009). Subtitle E contains the carryover
basis provisions. The Code would be interpreted as if those provisions of EGTRRA had never
been enacted. (The carryover basis provisions would still apply for 2010 decedents who elect to be
subject to carryover basis instead of paying estate tax. TRA 2010 § 301(c) begins
“Notwithstanding subsection (a) …”, and subsection (c) specifically states that the amendments in
subsection (a) repealing the carryover basis provisions do not apply if the election is made.)
All of the other provisions of EGTRRA would be given effect for 2011 and 2012, including the
reduction of estate and gift tax rates (subtitle B), increase of unified credit exemption equivalent
and GST exemption and setting the gift exemption at $1.0 million (subtitle C), replacing the state
death tax credit with a state tax deduction (subtitle D), expansion of conservation easement rules
for estate tax purposes (subtitle F), modifications of GST provisions, including automatic
exemption allocations, retroactive allocations, qualified severances, modification of certain
valuation rules, and the GST “9100 relief provisions”(subtitle G), and the relaxation of the
requirements for deferred estate tax payments under I.R.C. § 6166 (subtitle H). This eliminates
the concern about the effect of the sunset rule in EGTRRA on all of those other provisions for
2011 and 2012.
However, TRA 2010 provides for temporary tax relief (generally for just two years), and TRA
2010 § 101(a) states that Section 901 of EGTRRA is applied by replacing “December 31, 2010”
with “December 31, 2012.” This means that the sunset rule of EGTRRA is now delayed for two
years, until following 2012. All of the uncertainties that we have had previously about the
EGTRRA sunset provision remain, but are “punted forward” for two years to 2013.

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Effective Dates
There are a variety of effective dates, described above for the various provisions.
Interestingly, some of the changes are effective retroactively for all of 2010, mainly the re-enactment of
the estate tax with a $5 million exclusion amount and 35% rate (but subject to the election to have
carryover basis apply instead of the estate tax), technical computational details for calculating estate and
gift taxes, increasing the GST exemption to $5.0 million for 2010, and clarifying that direct skip transfers
in trust in 2010 will not result in the application of GST taxes when distributions are later made to the
beneficiaries (at least to the oldest generation of direct skip beneficiaries when the trust is created).
Other changes are effective beginning in 2011. These include unification of the gift and estate exclusion
amounts, and the portability of the unused estate tax exclusion amount.
Several changes apply only to estates of decedents dying in 2010 prior to and GST transfers made in 2010
prior to the date of enactment — the provision allowing a delay in filing and paying tax until no earlier
than 9 months after the date of enactment. Similarly, the extended period for making disclaimers from
transfers arising by the death of a decedent applies only to decedents who die in 2010 before the date of
enactment.
A very key change from the Baucus bill is that the changes to the gift tax in the Baucus bill (imposing a
45% rate) and reinstituting the GST tax on GST transfers applied to transfers after the date of
introduction of that bill (December 2, 2010). This would have removed many opportunities for year-end
transfer planning in December. Fortunately, TRA 2010 does not apply an effective date for gifts or GST
transfers before 2011.

What’s Left Out?
Several provisions in the Baucus bill, including some provisions that we have seen in various bills in the
last several years, are not included in TRA 2010. The following provisions in the Baucus bill and several
other proposals that have received some attention over the last several years were not included.
(1) Farmland. Estate taxes on farmland could be deferred under the Baucus bill until the farmland is
sold or transferred outside the family or ceases to be used for farming. The executor would have
to make a special election to exclude the farmland from the gross estate, attach a qualified
appraisal of the farmland to the estate tax return, and file an agreement that provides for a never-
ending estate tax recapture provision when the farmland is later sold, transferred outside the
family, ceases to be used as farmland, or is encumbered by a nonrecourse indebtedness secured in
whole or in part by the farmland. (There are complex provisions regarding the amount of the
recapture tax payable by intervening generations, taking into account subsequent appreciation in
the farmland, and requiring that “qualified heirs” file annual information returns describing
whether any of the recapture triggering events has occurred.)
(2) Special Use Valuation. The Baucus bill would have increased the special use valuation adjustment
amount from $750,000 (indexed to $1.0 million in 2010) under current law to $3.5 million
(indexed from 2009 beginning in 2011). Therefore, up to a $3.5 million (indexed) reduction in
value would have been allowed for farm or business property that satisfied the special use
valuation requirements. This provision was effective for estates of decedents dying after and gifts
made after 2009 (and therefore applied for 2010 decedents).
(3) GRAT 10-Year Minimum Term. The Baucus bill included the proposal in the President’s Budget
Proposal for the last two years of a GRAT 10-year minimum term. Under the proposal, grantor
retained annuity trusts must have a 10-year minimum term, the annuity amount cannot decrease
in any year, and the remainder interest must have a value greater than zero determined at the time

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of the transfer to the trust. The Baucus bill would have applied this minimum 10-year GRAT
provision to transfers after the date of enactment.
At this point, there has been no indication whether the deletion of this provision reflects
Congressional policy not to impose a 10-year minimum term on GRATs, or whether the
Congressional writers are just saving this revenue raising provision for subsequent legislation.
The discussions surrounding the passage of TRA 2010 did not include any element of needing
revenue offsets to “pay for” the changes. Indeed, the entire package is viewed as an economy and
job creation stimulus. At some point, in the future, the revenue impact of legislation will again
matter, and revenue raisers, such as this one, may re-emerge.
(4) Consistency of Basis. The Baucus bill also included the consistency of basis proposal in the
President’s Budget Proposal for the last two years The basis of property in the hands of heirs
would be the same as its value as finally determined for estate tax purposes, and the basis of
property in the hands of donees for purposes of determining loss would be limited by the fair
market value (under I.R.C. § 1015) as finally determined for gift tax purposes. (This provision in
the Baucus bill was retroactive, applying to “transfers for which returns are filed after the date of
enactment.”)
As with GRATs, the deletion of this provision may just mean that it is being saved for future
legislation when revenue offsets will be needed because this is a revenue raising provision.
(5) Gift Tax Separate Years for 2010 Gifts Before and After Date of Introduction. The Baucus bill
would have resulted in different gift tax rates for gifts made in 2010 before and after December 2,
2010. A provision in the Baucus bill addressing the mechanics of reporting those gifts was not
needed in TRA 2010.
(6) Section 2704. TRA 2010 (as well as the Baucus bill) does not contain any provisions addressing
I.R.C. § 2704 (as requested in the President’s Budget Proposal the last two years). (This provision
has not been included in any statutory proposal.)
(7) State Death Tax Deduction. The extension of the estate tax provisions of EGTRRA means that
the state death tax credit does not get reinstituted in January (which would have caused the re-
emergence of state death taxes in many states that just have a “federal credit pick-up system” and
that therefore have no state estate taxes if there is not a federal death tax credit). Furthermore,
some have speculated that as a revenue raiser, Congress may at some point delete the deduction
for state death taxes that now exists under I.R.C. § 2058. That was not done in TRA 2010.

Effects on Year-End Planning
The Baucus bill would have had a major impact on year-end planning. Many individuals have been
waiting until the end of the year to make 35% gifts, to make direct skip gifts, and to make distributions
to skip persons from trusts that are non-exempt for GST tax purposes, in order to make sure that the
45% gift tax rate and GST tax are not applied retroactively. There has been no prior public discussion of
making the gift and GST tax provisions effective on the date of INTRODUCTION of a bill, and the
inclusion of the date of introduction effective date in the Baucus bill was quite surprising. Fortunately,
TRA 2010 has no such early effective date, and year-end planning opportunities will continue throughout
the end of the year (if the legislation passes in its current form).
The following is a general framework for year-end transfer planning strategies.
(1) Certainty. The passage of TRA 2010 provides a substantial degree of certainty regarding various
effects of year-end planning transfers that we did not have previously.

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(2) No Gift Tax Advantage of Making Gifts in 2010 Unless Donor is Willing to Pay Gift Tax. If
TRA 2010 passes, there is generally no advantage to making gifts in December rather than in
January if the donor does not want to pay gift tax. The rate would be the same (35%) if there is
gift tax, and there is more gift exemption in January to cover gift transfers in case the IRS argues
for higher gift values on audit. Furthermore, gifts before the very end of the year run the risk that
the donor may die before the end of the year, in which event the carryover basis election could be
made to avoid any transfer taxes at all on the estate assets. (One exception to this general rule is
deathbed planning for estates that would not owe federal estate taxes under the $5.0 million
estate exemption in 2010 under TRA 2010, but would owe significant state estate taxes. In many
states, pre-death gifts (even deathbed gifts) are excluded from the estate for state estate tax
purposes.)
Furthermore, some planners indicate that there can be long term benefits of making gifts in
December rather than January if (1) the donor is willing to pay current gift taxes, and (2) if future
legislation were to decrease the exemptions and increase the rates from the levels set in TRA 2010.
There are several contributing factors to tax savings by making gifts in 2010 in order to pay larger
current gift taxes than if the gift is made in January. (1) Gift taxes are removed from the gross
estate if the donor lives at least three years, resulting in some of the estate being taxes on a “tax-
exclusive” basis. Making the gift in December involves paying greater taxes, so this potential
advantage would be larger. (2) Paying transfer taxes on a portion of the estate at rates below the
ultimate estate tax rate can save overall combined transfer taxes. This would be important if the
estate tax rates were to be increased in the future. Each of these factors is addressed below.
a. Taxing Portion of Estate on Tax-Exclusive Basis if Donor Lives Three Years (By Removing
Gift Tax From Taxable Base). If a donor lives three years after making a gift, any gift tax
paid are removed from the gross estate. This can result in a significant overall tax savings.
If a client is willing to entertain that planning strategy, making the gift in December, when
there is only a $1 million gift exemption rather than the $5 million gift exemption that will
apply in January, will result in a larger gift tax payment, which in turn results in a larger
amount removed from the gross estate if the donor lives at least three years after making
the gift. Detailed calculations would be required to determine the overall effects of paying
additional gift taxes (taking into account the assumed appreciation rate of the transferred
assets, the time value of the tax payments, and the assumed future level of estate tax
exemption amounts and rates).
b. Taxing Portion of Estate at Lower Rates In Case Estate Tax Rates Rise in the Future. If
gifts are made in December rather than January, savings results from paying gift taxes on a
portion of the estate at a 35% rate if the later estate tax rate were to be increased (for
example, to 45% or 55%). (See the examples in Item 5b of the General Summary of
Estate, Gift and GST Tax Provisions section for a general discussion of the impact of gifts
on later estate tax determinations.) The following examples compare making gifts in
December and January, assuming that the estate tax rate at the date of death increases to
45%. The examples isolate the effect of the changing rates by not including the advantage
of paying some of the tax on a tax-exclusive basis by removing the gift tax from the estate
if the donor lives 3 years after making the gift. That factor would further increase the
advantage of paying larger gift tax by making the gift in December (with a $1 million
exemption) rather than in January (with a $5 million exemption).
Example 1 (Gift of $10 million in January 2011; Death in 2013 With Exclusion of $3.5
Million and Top Rate of 45%). Assume A makes a gift of $10 million in January 2011

Bessemer Trust 25

and dies in 2013 with a taxable estate of $5 million (including the gift tax paid, which is
added to the gross estate because A did not live three years after making the gift). Assume
that Congress has changed the applicable exclusion amount back to $3.5 million and has
increased the top rate to 45% for 2013.

Gift Calculation

(at 45% top rate) $6,630,800
Less gift unified credit on $5M exemption
(using 45% rate) - 2,130,800
- 2,250,000
(4) Less unified credit on $3.5 million exclusion
(using 45% top rate) - 1,730,800
(5) Estate tax 2,650,000

Example 2 (Gift of $10 million in December 2010; Death in 2013 With Exclusion of $3.5
Million and Top Rate of 45%). Assume A makes a gift of $10 million in December 2010
and dies in 2013 with a taxable estate of $5 million (including the gift tax paid, which is
added to the gross estate because A did not live three years after making the gift). Assume
that Congress has changed the applicable exclusion amount back to $3.5 million and has
increased the top rate to 45% for 2013.

Gift Calculation
Less unified credit on $1 million exclusion amt - 330,800

(at 45% top rate) $6,630,800
Less gift unified credit on $1M exemption (45% rate) - 345,800
- 4,035,000
(4) Less unified credit on $3.5 million exclusion
(using 45% top rate) - 1,455,800
(5) Estate tax 1,140,000

Bessemer Trust 26

Observations Regarding Example 2. The total gift tax and estate tax is $3,150,000 gift tax
plus $1,140,000 estate tax, or $4,290,000. If the gift had not been made, the estate tax on
a $15 million taxable estate would have been 5,175,000. Making the gift saved $885,000
of combined tax. (The $10 million gift had a 35% tax rate apply to $9 million — the
amount of the gift not covered by the $1 million exemption. If the gift were not made, that
$9 million would have been taxed at 45%. The additional 10% of the $9 million amount
would represent $900,000 of savings. This is offset by $15,000 of reduced savings because
the gift tax credit on the $1 million of gift exemption was only in the 39% bracket. To get
to the 45% bracket of credit, there would be an additional 2% of $250,000 (the
$1,000,000 to 1,250,000 bracket) and 4% of 250,000 (the $1,350,000 to 1,500,000
bracket), or $15,000.)
Comparison of Examples 1 and 2.
January 2011 Gift, combined gift and estate tax: $1,750,000 + 2,650,000 = $4,400,000
Dec. 2010 Gift, combined gift and estate tax: $3,150,000 + 1140,000 = $4,290,000
Savings by making gift in December rather than January: $ 110,000
Observe, if the donor had lived for three years after making the gift, so that the gift tax
was excluded from the gross estate, resulting in paying transfer tax on a tax-exclusive
basis on $9 million rather than just $5 million of the estate, there would have been even
greater savings by making the gift in December rather than in January.
Practical Planning Pointer: If a donor is willing and able to pay current gift taxes, making a
large gift in December rather than in January can result in significant overall tax savings
attributable to (1) paying a portion of the transfer tax on a tax-exclusive basis if the donor
lives three years after making the gift, and (2) paying a portion of the transfer tax at a
lower rate if the estate tax rate increases above 35% by the time of the donor’s death.
These savings would have to be offset by the lost time value of the gift tax payment as
compared to paying estate tax at a later time (but the growth attributable to the retained
gift tax amount would have been subject to estate tax).
(3) Significant GST Opportunities. The major year-end planning opportunities relate to GST
planning. Opportunities to take advantage of the GST tax not applying to generation-skipping
transfers in 2010 are significant. The GST planning opportunities include (1) direct skip gifts for
grandchildren (or even for great-grandchildren), (2) making distributions from non-exempt trusts
to remote beneficiaries (skip person beneficiaries) without the imposition of a GST tax, or (3)
terminating non-exempt trusts this year and distributing assets to younger generation beneficiaries
without the imposition of a GST tax. Furthermore, TRA 2010 makes clear that generation-
skipping transfers can be made in trust without risking having GST tax apply to later transfers to
the oldest generation level skip person beneficiaries of the trust when the transfer is made in 2010.
(This is discussed in more detail in the following GST Issues section of this summary.)
(4) Retroactive Legislation Taxing Gifts and GST Transfers in 2010 is Extremely Remote. It seems
extremely unlikely that the 2011 Congress will retroactively change the estate, gift and GST tax
rules back into 2010, particularly changes that would adversely impact gifts and GST transfers
made in 2010. The fact that Republicans will control the House and will pick up seats in the
Senate make the likelihood such possible retroactive legislation, effective back into 2010, so
remote as to be nonexistent.

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GST Issues
(1) Sunset Rule Uncertainties. The sunset rule changes, discussed above in Item 7 of the General
Summary of Estate, Gift and GST Tax Provisions section, remove many of the uncertainties we
have had about the GST tax for 2010 and about whether and how the GST relief provisions in
EGTRRA (increased GST exemptions, automatic allocation, qualified severances, “9100 relief”
for late allocations, etc.) would still be given effect after 2010. Unfortunately, the relief under
TRA 2010 only lasts for two years, and all the uncertainty will arise again following 2012.
However, TRA 2010 shows how the EGTRRA adverse effects can easily be solved by a legislative
change, and making that change is not controversial at all. There seems little doubt that the sunset
will be further extended following 2012, or that the various estate, gift and GST changes in
EGTRRA (other than the repeal of the estate tax with carryover basis and the repeal of GST tax)
will be extended permanently. But with Congress, nothing can be certain.
(2) GST Applicable Rate in 2010 is Zero. For all of 2010, the GST tax “applicable rate determined
under section 2641(a)... is zero” for all generation-skipping transfers made in 2010. [TRA 2010 §
302(c).]
a. Impact of Transfers in Trust. The change in nomenclature is particularly important
because of its impact on direct skip gifts in trust for grandchildren (or more remote
beneficiaries). This change clarifies that “direct skip” gifts for grandchildren to trusts that
were made earlier in 2010 will not result in having the GST tax apply when distributions
are made from the trust to the grandchild in later years. This provision replaces I.R.C. §
2664 as added in EGTRRA, which section says that Chapter 13 “does not apply to
generation-skipping transfers after December 31, 2009.” While § 2664 results in a zero
GST tax for direct skip gifts in 2010, saying that all of Chapter 13 does not apply raises
the possibility that direct skip gifts in trusts may be subject to later GST taxation upon
distribution to the beneficiary because the “move-down rule” in I.R.C. § 2653(a), which is
in Chapter 13, would not apply. Under the new nomenclature, Chapter 13 (including the
move-down rule as well as the rule in I.R.C. § 2642(c) saying that annual exclusion gifts
to single beneficiary vested trusts have an inclusion ratio of zero) does apply to GST
transfers in 2010 (so the potential uncertainty about direct skip gifts to trusts is resolved).
The same issue applies regarding a taxable distribution or taxable termination in 2010
that results in the assets passing to another trust. The move down rule will apply in that
situation as well, because it applies whenever there is a generation-skipping transfer (even
though the rate on the generation-skipping transfer in 2010 is zero).
b. Inclusion Ratio Is Not Automatically Zero for Generation Skipping Transfers in 2010.
Under § 2641(a), the applicable rate is the “maximum Federal estate tax rate” times “the
inclusion ratio with respect to the transfer.” The statutory language of TRA 2010 §
302(c), that the “applicable rate determined under section 2641(a)” is zero, does not make
totally clear whether the “maximum Federal estate tax rate” is deemed to be zero or
whether “the inclusion ratio” is zero. The argument could be made that if the result of the
multiplication of the maximum estate tax rate times the inclusion ratio is zero, and if the
maximum estate tax rate is set by statute, the inclusion must, by basic mathematical
principles, be zero. If the inclusion rate is zero for any GST transfer made in 2010, direct
skip gifts (which would be “generation-skipping transfers”) would arguably result in a
trust with an inclusion ratio of zero for generations to come. However, nothing in the
statutory language suggests that is the intended result. Apparently the intent is just to
provide that there is no GST tax this year by saying that the applicable rate is zero,

Bessemer Trust 28

without a mathematical exercise of how that is achieved under the statutory formula. The
more likely interpretation is that there is no GST tax on GST transfers in 2010, but
transfers to trusts in 2010 do not automatically result in a zero inclusion ratio for the
trust. GST exemption would have to be allocated to the transfer to result in a zero
inclusion ratio. The Joint Committee on Taxation Technical Explanation agrees that the
inclusion ratio will not be zero, but that the amendment means that the highest estate tax
rate that is used in the formula is zero in 2010:
“…the generation skipping transfer tax rate for transfers made during 2010 is zero
percent. The generation skipping transfer tax rate for transfers made after 2010 is
equal to the highest estate and gift tax rate in effect for such year (35 percent for
2011 and 2012).” Joint Committee on Taxation Technical Explanation at 50.
In any event, the statute would have been clearer if it had stated that for purposes of §
2641(a), the “maximum Federal estate tax rate” would be deemed to be zero for
generation-skipping transfers in 2010.
(3) Direct Skip Gifts in Trust. Under TRA 2010, direct skip gifts made to trusts in 2010 do not risk
having the GST tax apply when the trust later makes a distribution to a grandchild-beneficiary.
Taking advantage of this opportunity will require making a transfer that for sure is a direct skip.
a. Outright or Custodianship Gifts. A transfer directly to or to a custodianship for a
grandchild (or more remote beneficiary) will clearly be a direct skip.
b. Gifts in Trust. For gifts in trust, we need to examine the definitional provisions in the GST
rules.
(i) Move-Down Rule. The move-down rule of § 2653 applies if there is a generation-
skipping transfer of property (a direct skip, taxable distribution of taxable
termination, § 2611(a)) and the property is held in trust. The effect is that for
purposes of applying the GST tax rules, the trust will be treated as if the transferor
of such property were assigned to one generation above the highest generation of
any person who has an “interest” in the trust immediately after the transfer. (So if
a grandchild has an interest in the trust, the transferor level will be moved down to
the child-level so that a subsequent distribution to a grandchild would not be
distribution to someone two or more generations below the transferor that would
generate a GST tax.
(ii) Skip Person Definition. The key is that for the move-down rule to apply, there
must be a distribution to a skip person (whether it is a direct skip, taxable
distribution or taxable termination). Skip persons are defined in § 2613. A trust is
a skip person if (1) all “interests” in the trust are held by skip persons, or (2) if no
person holds an “interest” in the trust and at no time may a distribution (including
distributions on termination) be made to a non-skip person. I.R.C. § 2613(a)(2).
As to item (2), the regulations add that if no one holds an immediate interest in the
trust, for purposes of determining whether any distribution could be made to a
non-skip person, a possible distribution that has a probability that is so remote as
to be negligible (applying actuarial standards showing there is less than a 5%
probability) is disregarded. Treas. Reg. § 26.2612-1(d)(2).
(iii) Interest Definition. An “interest” in a trust is defined in § 2652(c). A person holds
an interest if, at the time the determination is made, the person (1) has a right
(other than a future right) to receive income or corpus fro the trust, or (2) is a

Bessemer Trust 29

permissible current recipient of income or corpus. (There are other special rules if
the trust is a charitable trust.) I.R.C. § 2652(c)(1). However, an interest that is
used primarily to postpone or avoid any GST tax is disregarded. I.R.C. §
2652(c)(2). Also, the fact that a distribution may satisfy another person’s support
obligation is disregarded if such use is discretionary or is pursuant to a UGMA or
UTMA transfer. I.R.C. § 2652(c)(3).
(iv) Application of Definitions to Trusts. Under these definitions, a trust will be a skip
person (and therefore, result in application of the move-down rule) if a second
generation or more remote beneficiary must have a right to receive current
distributions or is a permissible current recipient of distributions and if there are
no interests held by non-skip persons. If that is the case, it does not matter that
non-skip persons may be contingent remaindermen or future beneficiaries. (The
possibility that non-skip persons may receive benefits in the future applies under
the statute and regulations only if there are no persons that hold interests in the
trust when it is created (for example if no distributions can be made to anyone for
a period of years).
(v) “Generation Jumping.” If the distribution is made to a trust for great
grandchildren only, the transferor will be moved down to the grandchild level, so
that future distributions to the great grandchild will not be generation-skipping
transfers. Some planners have termed this “generation jumping.”
(vi) Addition of Upper Generation Beneficiaries at a Later Time. Some planners suggest
that some independent party (an independent trust, a trust protector, or any other
than the donor) could provide that upper level generations could later be added as
beneficiaries without causing the trust to lose its status as a skip person trust
(resulting in application of the move-down rule). The older generation beneficiaries
could only be added at a later time — long enough to provide comfort that such
persons could not be viewed as having an interest in the trust currently. (Jonathan
Blattmachr suggests waiting five years.) This would help to counter any argument
that the non-skip person should be treated as an intended current beneficiary by
implication or under some kind of application of a step transaction theory. Some
planners even suggest that the trust agreement could provide that older generation
beneficiaries would automatically become discretionary beneficiaries after a stated
period of time — such as five years.)
(vii) No Current Grandchildren. If an individual has no current grandchildren but
would like to take advantage of the unique opportunity in 2010 to make transfers
to direct skip trusts, considering having the individual make transfers to a trust for
grandnieces or grandnephews (if the individual has any), or other beneficiaries who
are in a generation assignment two generations below the individual. The trust
could provide that any future grandchildren would also be potential beneficiaries.
However, to avoid the rule disregarding nominal interests, consider providing for
certain mandatory distributions to the existing grandnieces and grandnephews (or
other designated second generation individuals) to avoid an argument that the trust
was really just created for the benefit of non-existent grandchildren at the time it
was created.
(4) Move-Down of Transferor vs. Allocation of GST Exemption to Trust. If the move-down rule
applies, the transferor is merely moved to one generation above the oldest generation, but the

Bessemer Trust 30

trust does not become fully exempt. For example, if a direct skip is made to a trust for a
grandchild, the move-down rule treats the trust as if the transferor were in the child-generation, so
that a future distribution to a grandchild (one generation down from the transferor) is not subject
to the GST tax. However, a distribution to a more remote beneficiary (whether on termination of
the trust or during the term of the trust) would generate a GST tax if no GST exemption has been
allocated to the transfer.
On the other hand, if GST exemption is allocated to the transfer, so that the trust results in having
a zero inclusion ratio, all future distributions from the trust to any generation levels of
beneficiaries would be GST exempt.
Donors 2010 will have to decide whether (a) to make direct skip transfers in trust (which could be
unlimited in amount) and forego using up any GST exemption to allocate to the transfer, or (b) to
make transfers to GST exempt trusts, which could last for as many generations as would be
allowed under applicable rules against perpetuities, but which would be limited in amounts that
be covered by the $5.0 million of GST exemption available in 2010.
(5) Taxable Distributions or Taxable Terminations This Year May Be Made Without GST Tax. The
Baucus bill would have eliminated the ability to make GST tax-free taxable distributions or
taxable terminations from trusts after December 2, 2010. Under TRA 2010, distribution
opportunities from non-exempt trusts remain before the end of 2010. As with direct skips, if
taxable distributions or taxable terminations result in the assets being held in further trust, the
move-down rule applies. Before TRA 2010, it was not clear that taxable distributions could be
made in further trust for trust beneficiaries (for example under a decanting statute or pursuant to
discretion granted to the trustee under the trust agreement) without the possible imposition of a
GST tax when later distributions were made to those beneficiaries.
(6) Timing of Actual Distribution. Planners must make sure that the direct skip or taxable
distribution occurs during 2010 to take advantage of the special opportunity available only during
2010 to have a GST tax rate of zero. There is nothing in the statute or regulations about
specifically when title must pass under state law to determine when the direct skip, taxable
distribution or taxable termination occurs. However, transfers that are mandated under the
instrument should be treated as occurring on that date, even if the trustee does not make the
physical transfer until a later date. (Otherwise, planners could manipulate the timing of the
payment of GST taxes by merely delaying mandated distributions until a later year or years.)
Similarly, a specific bequest under a will of a person who dies in 2010, that is vested and is not
subject to the discretion of an executor as to the amount of the bequest, should be treated as
occurring as of the date of death, even if the executor delays for years in making the physical
distribution of assets satisfying the bequest. However, in light of the very special treatment of
generation-skipping transfers in 2010, best practices would include making physical distribution
of the assets, if at all possible, in 2010 in order to avoid any possible argument that the direct skip
did not occur in 2010.
Discretionary distributions, on the other hand, result in generation-skipping transfers occurring on
the actual distribution date pursuant to the exercise of discretion.
A case that involved an agreement with the IRS regarding the timing of generation-skipping
transfers, albeit in an unusual fact situation, is Robertson v. U.S., 97 A.F.T.R.2d 589 (N.D. Tex.
2006). That case involved a charitable lead annuity trust that passed to grandchildren at the end
of the trust term. The trustee had total discretion as to what charities would receive distributions
during the term of the trust, so no person held an “interest” in the trust during its stated term.
The conclusion was that there was no taxable termination at the end of the stated term, because

Bessemer Trust 31

that required the termination “of an interest in property” and no person held an interest in the
trust prior to the stated termination date. Therefore distributions from the trust were treated as
taxable distributions. The IRS did not contest the position of the taxpayer that the taxable
distributions occurred in the year following the stated termination date of the trust, and the
parties stipulated that the date of actual distribution was the appropriate date for valuation of the
GST amount and for applying the GST tax rate (the rate decreased in the year following the stated
termination date of the CLAT). That stipulation seems to conflict with the generally accepted
approach of treating transfers that are mandated in an instrument as occurring on the mandated
vesting date.
(7) Testamentary Transfers From 2010 Decedents. The possibility that 2010 testamentary transfers
are forever exempt from the GST tax would be eliminated under TRA 2010 because the estate tax
would apply (or be deemed to apply) to 2010 decedents so the decedent would be a “transferor”
under the GST definitions. TRA 2010 § 301(c)(last sentence). (Under the provisions of EGTRRA
applicable in 2010, there was an argument that testamentary trusts created by 2010 decedents
were exempt from the GST tax, because under the GST rules the “transferor” is the last person
subject to a transfer tax, and decedents who die in 2010 are not subject to estate tax [before TRA
2010]. The definitions of skip persons and non-skip persons are tied to the definition of
“transferors.” Non-skip persons are everyone other than skip persons (§ 2613(b)), and if skip
persons cannot be identified because of the lack of a transferor, perhaps the whole world would
constitute non-skip persons. If so, future transfers from the trust arguably would not be subject to
GST tax.) TRA 2010 clearly removes that argument that had existed under EGTRRA.
(8) 2010 GST Exemption of $5.0 Million. Under TRA 2010, there is 2010 GST exemption of $5.0
million (because the estate tax exemption in 2010 is $5.0 million and the GST exemption is the
same as the estate exemption, § 2631(c)). (Without this legislation, it appears that there is no GST
exemption for 2010, because the GST exemption equals the estate tax applicable credit amount
and in § 2010(c), as amended by EGTRRA, the table for the applicable credit amount ends with
2009; there is nothing listed for 2010 or beyond. While there is no GST exemption in 2010 under
EGTRRA, in 2011 there may have been a GST exemption equal to $1.0 million, indexed for
inflation since 1997, depending on how the “had never been enacted” rule was applied. See I.R.C.
§ 2631(c) (prior to amendment by the 2001 Act). That number is $1.34 million for 2010.)
A possible exception to having $5 million of GST exemption for 2010 is that, as currently drafted,
the statute arguably would not result in a 2010 GST exemption amount for estates that make the
carryover basis election. In that circumstance, the “repeal of the repeal of the estate tax” under
TRA § 301(a) does not apply, so literally chapter 11 does not apply to the estate. If chapter 11
does not apply, the amendment in TRA 2010 of I.R.C. § 2010 providing a $5.0 million applicable
exclusion amount is irrelevant because § 2010 is in chapter 11 and it does not apply. An argument
to the contrary is that the election for the estate tax not to apply under TRA § 301(c) applies only
“with respect to chapter 11 of such Code and with respect to property acquired or passing from
such decedent (within the meaning of section 1014(b) of such Code),” and therefore does not
apply for GST purposes. Therefore, the reference in I.R.C. § 2631(c) to the “applicable exclusion
amount under section 2010(c)” may continue to refer to the $5.0 million amount. The possibility
of having no GST exemption for testamentary transfers in estates making the carryover basis
election apparently is unintended (it certainly would be unjust to apply the GST tax scheme to
testamentary transfers but not afford an opportunity to use GST exemptions). This result
apparently is unintended, and the Joint Committee on Taxation Technical Explanation clearly
takes the position that the $5 million GST exemption applies for 2010 decedents whether or not
the carryover basis election is made:

Bessemer Trust 32

“The $5 million generation skipping transfer tax exemption is available in 2010 regardless
of whether the executor of an estate of a decedent who dies in 2010 makes the election
described below to apply the EGTRRA 2010 estate tax rules and section 1022 basis
rules.” Joint Committee on Taxation Technical Explanation at 50 n.53.
Having 2010 GST exemption of $5.0 million is very important for various reasons. First, consider
electing out of automatic allocation of the 2010 GST exemption to direct skip gifts. Second, the
$5.0 million of GST exemption can be allocated on timely filed returns, based on the values of
gifts to trusts on the dates of the gifts in 2010. Third, there is $5.0 million of GST exemption that
can be allocated to transfers in prior years on a late allocation.
a. Elect Out of Automatic Allocation for Direct Skip Transfers in 2010. The change in
nomenclature in TRA 2010 to avoid saying that chapter 13 does not apply to GST
transfers in 2010 has two important implications for direct skip gifts in trust: (1)
Automatic allocation of GST exemption to the direct skip will occur under I.R.C. §
2632(b)(1) to the extent necessary to result in a zero inclusion ratio for the transfer unless
there is an election out of such automatic allocation; and (2) the move-down rule of I.R.C.
§ 2653(a) will apply and the zero inclusion rule under I.R.C. §2642(c) for single
beneficiary-vested annual exclusion gifts in trust will apply, so that future distributions to
the grandchild-beneficiary of the trust will not be subject to the GST tax. These effects are
discussed below.
There is generally automatic allocation of any unused GST exemption to direct skip gifts
(whether or not in trust). I.R.C. § 2632(b)(1). Such automatic allocation to direct skip
gifts can be avoided by electing out of automatic allocation on a timely filed gift tax
return. I.R.C. § 2632(b)(3); Treas. Reg. § 26.2632-1(b)(1).
Under TRA 2010, the nomenclature that chapter 13 does not apply has been dropped, so
§ 2632(b)(1) would apply to all direct skips, whether or not in trust, but only “to the
extent necessary to make the inclusion ratio for such property zero.” Therefore, automatic
allocation will apply for direct skips generally (whether or not in trust), but will not apply
to annual exclusion gifts to single beneficiary-vested trusts, because the inclusion ratio for
such transfers is already zero under I.R.C. § 2642(c). (Under the law before TRA 2010,
the same result may have occurred for direct skips in trust, though under a much more
convoluted analysis. Under EGTRRA, chapter 13 does not apply to direct skips, so the
automatic allocation rule of §2632(b)(1) would not apply. However, under the sunset rule
of EGTRRA (before it was amended by TRA 2010), the Code would be interpreted as if
EGTRRA had never been enacted with respect to future GST transfers, so the chapter 13
rules would be applied to have allocated GST exemption automatically to direct skip trusts
when a later taxable distribution or taxable termination occurs with respect to that trust.)
TRA 2010 makes clear that the move-down rule of I.R.C. § 2653(a) would apply to direct
skip gifts in trust in 2010. For example, if a direct skip gift is made in trust for the donor’s
grandchild, the move-down rule would cause the grandchild’s parent to be treated as the
transferor to the trust with respect to future transfers, so that subsequent transfers to the
grandchild-beneficiary would not cause a GST tax to apply. In that circumstance, GST
exemption that is automatically allocated to the trust would have been wasted if it is likely
that distributions from the trust will ultimately be made to the grandchild-beneficiary.
(On the other hand, if the intent is to keep the trust intact for the grandchild’s
descendants, allocation of GST exemption to the trust would be appropriate and
desirable.)

Bessemer Trust 33

Practical Planning Pointer: Planners must carefully examine all direct skip gifts in 2010
(whether or not in trust and whether inter vivos or by testamentary transfers) to determine
whether a timely filed tax return should be filed electing out of automatic allocation.
b. Timely Allocation of 2010 GST Exemption.
If a timely allocation is made, I.R.C. § 2642(b)(1)(B) says that the GST exemption
allocation is made effective as of the date of the gift using values on that date. Late
allocations are effective as of the date of the allocation, §2642(b)(3)(B), or as of the time
the late allocation is made in 2011 (using values on that date, thus requiring allocation of
GST exemption to the appreciation occurring up to that date). A late allocation cannot be
filed until April 19, 2011 at the earliest (the due date is April 18). If the donor’s income
tax return is extended, that automatically extends the gift tax return as well to October 15
(or October 17 in 2011). In 2011, a late return for the October deadline could not be filed
until October 18, 2011. Before TRA 2010, there was no GST exemption in 2010 and it
was unclear under the sunset rule whether 2010 GST exemption would be deemed to have
existed with respect to generation-skipping transfers occurring after 2010. If there was no
2010 GST exemption, there would be a necessity of waiting to file a late allocation of
2011 GST exemption, based on the appreciated values at the time of the allocation.
Fortunately, that potential problem has been resolved by TRA 2010.
c. Late Allocations of 2010 GST Exemption to Transfers in Prior Years. Individuals
sometimes wish to allocate more GST exemption to prior trust transfers than the
individual has remaining. Having the additional $1.5 million of GST exemption (above
the $3.5 million available in 2009) opens up the possibility of being able to allocate
substantial additional GST exemption to prior trust transfers at current trust values.
(However, this opportunity has minimal effect at this late date in 2010. The only benefit
of making a late allocation currently, rather than waiting until 2010, is that the allocation
could be made based on current values as opposed to values in January (or some later
date).)
(9) 2010 Transfers Not Grandfathered. Transfers to trusts in 2010 are not grandfathered or exempt
from the GST tax. Trusts with contributions in 2010 will be GST exempt only if GST exemption
is allocated to those transfers.
(10) May Provide Clarity Regarding ETIPs. GST exemption cannot be allocated to transfers subject to
an “estate tax inclusion period” (or ETIP) during which the assets would be included in the gross
estate of the transferor (or his or her spouse). I.R.C. § 2642(f). An example is a transfer to a
GRAT, because some or all of the trust may be included in the transferor’s gross estate if he or she
dies during the GRAT term. GST exemption can be allocated at the end of the ETIP, and indeed
there are rules for automatically allocating GST exemption at the end of the ETIP in certain
situations. See Treas. Reg. § 2632-1(c). During 2010, chapter 11 did not apply under EGTRRA so
arguably ETIPs ended as of January 1, 2010 because the trust assets would not have been included
in the transferor’s gross estate if he or she died after 2009. There were questions as to whether the
ETIP would be reinstated at the end of 2010 when the EGTRRA sunset occurred and the estate
tax would again apply. If the ETIP terminated on January 1, 2010, could GST be allocated when
the ETIP terminated in 2010 — even there is no GST exemption for 2010? EGTRRA raised many
uncertainties regarding the treatment of ETIPs. The result of TRA 2010 is not clear, but TRA
2010 may remove many of the uncertainties. It would provide that the estate tax did continue to
apply after 2009 (subject to the election of carryover basis instead). Does this mean that an ETIP

Bessemer Trust 34

that we thought had ended on January 1 really did not end, so the ETIP continues without
interruption and the uncertain results under EGTRRA are no longer a concern?

Construction Issues
(1) Formula Bequests. The change in the law raises various potential construction issues in construing
formula bequests. For example, consider the effect of TRA 2010 in construing several possible
types of formulas, keeping in mind that the estate tax and the $5 million applicable exclusion
amount apply from January 1, 2010.
• “Maximum amount that can pass free of estate tax” now appears to mean $5 million rather
than the entire estate.
• “An amount equal to the federal estate tax applicable exclusion amount” now appears to
mean $5 million rather than zero.
However, while the law seems to say that the amount passing under each of those formulas would
be $5 million for decedents dying any time in 2010, there are various uncertainties. Observe that
the resolution of each of these issues is a matter of state law, and as a practical matter will be
determined in each separate case based on the equities of the case and what the parties can
convince the court to be the testator’s intent.
a. Does Decision to Make Carryover Basis Election Change Construction? Does the
construction of the formula change if the executor makes the carryover basis election? In
that event, TRA 2010 § 301(c) says that the “repeal” of § 2210 in TRA 2010 § 301(a)
does not apply, so Chapter 11 does not apply, so the amended § 2010(c) changing the
applicable exclusion amount to $5 million for 2010 does not apply. If making the
carryover basis election changes the formula bequest, the executor not only has to make
decisions of whether the overall tax result is better to apply carryover basis than the estate
tax (which depends on a variety of factors, included when the assets with low basis are
likely to be sold or whether depreciation can be used to derive current tax benefits even
without selling an asset) and how to treat beneficiaries fairly in implementing carryover
basis and making the basis adjustments, but the executor also has to consider that the
election may drastically change the amounts of the bequests passing under the will. A
further complexity is that the carryover basis election is probably not due at least until the
decedent’s final income tax return is filed (see I.R.C. § 6075(a)) and perhaps later. So the
election may not be made until the fall of 2011, and the election could conceivably change
the construction of the values of bequests assets passing under the will of a decedent who
died perhaps as long as 21 months earlier.
b. Do Interests Passing Under Will Vest as of Date of Death Under State Law? The change in
the law could be almost twelve months after the date of death in 2010 and arguably
should not change the amounts passing under the will. Some state laws provide that assets
passing under a will vest as of the moment of death, subject to the administration of the
estate.
c. What if Assets Have Been Distributed? Does it make a difference if bequests have already
been funded? Changing the construction based on the new law, which is now effective as
of January 1, 2010, may require that beneficiaries refund previously distributed amounts.
Will that change the court’s interpretation of the formula bequests?
d. Practical Scenario. Assume a fairly typical scenario of a situation in which the decedent’s
children are not children of the surviving spouse and are hostile to the surviving spouse.

Bessemer Trust 35

Assume the will provided that the formula “tax-free” amount passes directly to the
children and that the balance of the estate passes to the spouse. Assume the local court
determines that amounts passing under the formula bequest depend on the carryover basis
election. This means that if the executor makes the carryover basis election, in which event
chapter 11 does not apply, the entire estate would pass to the children, but if the executor
does not make the carryover basis election, only $5 million passes to the children and the
balance passes to the surviving spouse. Assume the executor does not make the carryover
basis election, so most of the estate passes to the surviving spouse. Later the children sue,
and assume the court construes the formula bequest to mean that all of the estate passed
to the children. That state law ruling would mean that although the estate is subject to the
estate tax, nothing qualifies for the marital deduction. Furthermore, it may be too late at
that point (perhaps several years later) to change the decision not to make the carryover
basis election. (TRA 2010 § 301(c) states that the carryover basis election
“shall be made at such time and in such manner as the Secretary of the Treasury or
the Secretary’s delegate shall provide. Such an election once made shall be
revocable only with the consent of the Secretary…”
Perhaps that would be a situation in which the IRS would permit a change in the election.
Does it make a difference that in this circumstance, the executor chose not to make the
election so perhaps did not file anything making an affirmative election but merely filed a
timely estate tax return? (The statute, quoted above, says that an election into carryover
basis is revocable only with the Secretary’s consent, and in this scenario there was never an
election into carryover basis.)
(2) Construction in States With Legislation Tying Formula Bequests to 2009 Law. Seventeen states
(including the District of Columbia) have statues that construe formula “tax-free” bequest clauses
for 2010 decedents as referring to estate tax rules on December 31, 2009. (Those states are
Delaware, District of Columbia, Georgia, Idaho, Indiana, Maryland, Minnesota, Nebraska, New
York, North Carolina, Pennsylvania, South Dakota, Tennessee, Utah, Virginia, Washington, and
Wisconsin.) Will formula “tax-free” bequests in those states mean that $3.5 million continues to
pass under the clause rather than $5 million that could pass without estate tax under TRA 2010?
Most of those statue statutes say that the special construction applies only for 2010 decedents, but
if the federal estate or generation-skipping transfer tax becomes effective before January 1, 2011,
the statute will no longer apply as of the date the tax becomes legally effective.
Various uncertainties will apply in these states in light of the changes by TRA 2010.
• If the state has passed a statute providing that formula bequests are construed as if 2009 law
applied, will the bequest of the tax-free amount be limited to $3.5 million even though $5.0
million could pass to the bypass trust without incurring estate tax?
• Will state legislatures change their construction statutes?
• Will courts construe the formula to mean $5.0 million despite the state statute?
• For purposes of the sunsetting provision in a state construction statute, does TRA 2010
cause the federal estate tax to be legally effective as of January 1, 2010 so that the sunsetting
provision applies as of January 1, 2010, meaning that the state construction statute does not
apply at all?
• Does the carryover basis election change the result? (For example, if the carryover basis
election is made, the estate tax does not apply so the state statute says the tax-free amount
means $3.5 million, but if there is no election, the estate tax does apply as of January 1,

Bessemer Trust 36

2010 so the state construction state does not apply and the tax-free formula means $5
million.)
• Observe the difficulty the executor faces isn addressing this uncertainty. If the tax-free
formula bequest is $5 million if the estate tax applies but $3.5 million if carryover basis
applies, Howard Zaritsky concludes: “Would you want to be that executor?”
(3) Formula Bequests Equal to GST Exemption Amount. The specific language used in a GST formula
transfer must be closely reviewed to determine the effect of TRA 2010 on the formula. For
example, if the formula transfer applies “if Chapter 13 does not apply,” that clause arguably is
not triggered in light of TRA 2010, because it says that Chapter 13 does apply for all of 2010 (but
the GST rate is zero). If the formula is an “amount that can pass free of GST tax,” that might be
everything passing under the instrument. If the formula is an “amount equal to the GST
exemption,” that would be $5 million under TRA 2010. That would be the starting point of the
analysis, but this is still a state law construction issue, depending on the court’s interpretation of
the intent of the specific instrument and donor.

Effects on Planning Going Forward
The $5.0 million gift exclusion amount (and GST exemption) beginning in 2011 will open up a new
paradigm of thinking regarding transfer planning strategies. The ability to make transfers of up to $10
million per couple without having to pay gift taxes paves the way for many transfer planning
opportunities that, with leveraging strategies, can transfer vast amounts of wealth outside the gross estate.
A few examples of planning scenarios are highlighted below.
(1) Simple Gifts. The ability to move $5 million per individual ($10 million per couple) out of the
gross estate opens up the possibility for many individuals to transfer as much as they would want
to transfer to their descendants during life without any gift tax concerns.
(2) Gifts to Grantor Trusts. Making transfers to grantor trusts, where the donor continues to pay
income taxes on the trust income, has a huge impact on the amounts that can be transferred over
time. The trust assets compound free of income tax, and the payment of income taxes by the
donor further depletes his or her estate (substantially over time). Simple $5 million (or $10 million
for couples) gifts to grantor trusts can move huge amounts of value out of the donor(s)’ gross
estates over time.
(3) Gifts and Sales to Grantor Trusts. The transfer planning opportunities of gifts to grantor trusts
can be magnified by leveraging the amounts transferred with sales to the trusts. Sales to grantor
trust transactions in the past often are complicated by the difficulty of transferring sufficient
equity to the trust (typically by gifts) to justify selling large values to the trust for installment notes
from the trust. The $5 million gift exemption ($10 million for couples) relieves many of those
difficulties. For example, a couple could give $10 million to grantor trusts, and sell $90 million of
assets to the trusts with extremely low interest rate notes. The couple would continue to pay all of
the income taxes on the grantor trusts, further depleting their estates and allowing the trusts to
compound tax-free.
(4) Advantage of Sales to Grantor Trusts Compared to GRATs. GRATs have the advantage of
allowing transfers of future appreciation without incurring gift taxes. Sales to grantor trusts have
various advantages over GRATs, including (most importantly) that GST exemption can be
allocated to the grantor trust at the asset so that all appreciation in the trust is also GST exempt,
but GST exemption cannot be allocated to GRATs until the end of the retained annuity term.
Because there will not be as many concerns about making large gifts with the $5 million gift
exemption, sales to grantor trusts make take on increased importance over the use of GRATs.

Bessemer Trust 37

(5) Gift Splitting. If one spouse has most of the marital wealth, the couple can still take advantage of
both spouses’ $5 million gift exemptions by making the split gift election.
(6) Leveraging Transfers Through Valuation Discounts. If the transferred assets are discounts to
reflect lack of control or marketability, the value that can be transferred via the $5 million gift
exemption is further expanded.
(7) Gifts of Undivided Interests. Gifts of undivided interests in real estate result in the donated interest
being valued with a discount, and the remaining interest owned by the grantor at his or her death
would also receive an undivided valuation discount. Transfers of undivided interests in real estate
result in this double leveraging (both the transferred interest and the retained interest) of the
amount that can be transferred with gifts.
(8) Life Insurance Transfers. A limit on the amount of life insurance that can be acquired by an
irrevocable life insurance trust is the amount that the insured can give to the trust to make future
premium payments. Having $5 million ($10 million per couple) of gift exemptions to cover life
insurance premium payments can buy a very large amount of life insurance coverage that can pass
free of transfer tax to younger generations.
(9) Will Drafting. Should formulas in wills being drafted currently taking into consideration what
should happen based on various possibilities of Congressional action (or inaction) in 2012? What
if there is no Congressional action (think December 2009), and there is no estate tax but there is
carryover basis in 2013?
(10) Voluntary Tax? Perhaps the notion of the estate tax being a “voluntary tax” will become a reality.

Copyright © 2010 Bessemer Trust Company, N.A. All rights reserved.
This summary reflects the views of Bessemer Trust and is for your general information. The discussion of any estate planning alternatives and
other observations herein are not intended as legal or tax advice and do not take into account the particular estate planning objectives, financial
situation or needs of individual clients. This summary is based upon information obtained from various sources that Bessemer believes to be
reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed
herein are current opinions only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a
variety of factors, including changes in law, regulation, interest rates, and inflation.

Bessemer Trust 38

Legislation tra 2010 12 21_10_md_final

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