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Estate Tax Exclusion Set for 2011 and 2012
In December, 2010, Congress enacted P.L.
111-312,  the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010”, which, among other things, sets the federal estate tax exclusion under 26 U.S.C. §2010 at $5,000,000 for estates of decedents dying in the years 2011 and 2012. For estates in excess of that amount, the rate of taxation is 35%. The exclusion had been gradually increased from $675,000 in 2000 to $3,500,000 in 2009. In 2010, the exclusion was unlimited; i.e., no tax was imposed on estates of decedents dying in that year. However, if Congress had not acted, the tax would have been restored in 2011. Congress responded by amending the statute, as noted above. In other words, estates having a total value which is less than the amounts shown in the chart below are exempt from federal estate tax:

Year of Death
Exclusion
2001
$675,000
2002
1,000,000
2003
1,000,000
2004
1,500,000
2005
1,500,000
2006
2,000,000
2007
2,000,000

2008
2,000,000
2009
3,500,000
2010
[no tax]
2011
5,000,000
2012
5,000,000

 
Nevertheless, P.L. 111-312 also provides that the estate of a decedent who died in 2010 (which exceeds the $5,000,000 exclusion) is subject to taxation at the 35% rate, unless an appropriate election is made when the 2010 estate tax return is filed. (The time to file such returns is extended until September or October, 2011.) In other words, if we assume that a decedent died in 2010 (and his estate exceeded $5,000,000), his executor or administrator must timely file an estate tax return in 2011 for the year 2010 in which the appropriate election is made in order to preserve the complete tax exemption for 2010. If he fails to file a timely return, the tax will be imposed retroactively.
What is the result if a decedent died in 2010 (having an estate in excess of $5,000,000) and his executor conveyed real estate to a bona fide purchaser for value prior to the enactment of P.L. 111-312 in December, 2010? Assuming his executor fails to file a tax return in 2011 in which he elects an exemption for 2010, does a retroactive lien for unpaid taxes attach to the realty of the purchaser? The answer is unclear.
Why is the federal estate tax of interest to title insurers? The Internal Revenue Code [“IRC”], 26 U.S.C. §6324, creates a lien for unpaid federal estate tax; the duration of the lien is 10 years from the date of death. IRC §6324(a)(1) provides that the lien continues until it is paid or it expires. One section of the code, IRC §6324(a)(2), permits the transfer of the lien from the realty to the proceeds of sale, but only where certain types of estate property are involved. What types of estate property? The property defined by IRC §§ 2034 to 2042, inclusive. However, in most transactions that title companies are asked to insure, the realty will not fall within those sections. Rather, it will fall within IRC §2033, which states: “The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.” In other words, where the estate’s personal representative seeks to convey so-called 2033 property, the lien of federal estate tax must be addressed.
This is of course in addition to the lien of New Jersey estate tax, which applies to estates in excess of $675,000, and the lien of New Jersey transfer inheritance tax, which must be addressed where the heirs or devisees are non-Class A beneficiaries.
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