The President has signed the compromise tax bill, imposing a levy of 35% on estates valued in excess of $5,000,000 for people dying in 2011 and 2012 – that’s right; the new law is effective for only two years. Starting in 2013 the estate tax reverts to 2002 levels and is imposed at a rate of 55% on estates of only $1,000,000 or more. As many of you know, for people dying in 2010 only there was complete estate tax repeal, regardless of the size of the estate; that repeal was the product of the “Bush tax cuts” of 200 1 which, although principally addressing income taxes, also gradually increased the federal estate tax exemption from $1,000,000 to $3,500,000 in 2009. (The exemption is the largest amount that a person can pass upon his death without the imposition of a federal estate tax and is frequently called the “shelter” or “bypass” amount.)
For gifts made after 12/31/10, the gift tax will be reunified with the estate tax; this means that the $5,000,000 estate tax shelter amount will also be available for gifts. The law in effect prior to 2010 provided a $3,500,000 lifetime exemption for estates, but only $1,000,000 for gifts. The gift tax rate, starting in 2011, will be 35%. The exemption from the generation-skipping tax (GST) – the additional tax on gifts and bequests to grandchildren when their parents are still alive – will also rise to $5,000,000 from the $1,000,000 it would have been without the new law. The GST tax rate for transfers made in 2011 and 2012 will be 35%.
From a planning standpoint, a nice feature of the new law is that it makes it easier to transfer the $5,000,000 shelter amount to a surviving spouse, so married couples can shield $10,000,000 of their assets from taxes. In the language of tax professionals, the estate tax exemption will be “portable.”
What does the return of the estate tax mean for you? First, you need to review your Wills to make certain that you take advantage of the available shelter amount regardless of whether you die when the exemption is $5,000,000 or $1,000,000. You also should think about gifting assets to take advantage of the newly unified system and to ultimately save gift/estate tax. The bottom line: now that the estate tax is “closer’” than ·before· and repeal is no longer in the cards, many of you need to review your estate plans to ensure that you take advantage of the many available techniques and devices to avoid, minimize, and/or defer the estate tax. And, remember, Wills are not just about saving estate taxes, but also asset protection, inheritance management, and the passing of assets to future generations – so, even those of you with estates under $5,000,000, need carefully crafted Wills. For more information contact our office.