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Estate and Gift Taxes – Now We Know?

John Worley - Monday, January 17, 2011

After years of waiting for answers about the future of the Federal Estate Tax, a last minute tax bill established new rates and exemptions for 2011 and 2012. The new exemption amount is raised to $5 million for an individual and $10 million for a couple, and the tax rate on the excess has been lowered to 35%. More good news comes in the form of a “portability” feature, which just means that for couples, no special bypass trust or other sophisticated estate planning is required to take full advantage of the $10 million exemption. The gift tax (on gifts during lifetime) and the estate tax (on gifts at death) have once again been unified, so that lifetime gifts of up to $5 million will be tax free and if less than $5 million is given during life, the balance will remain as an estate tax exemption. Furthermore, for a married couple, the surviving spouse will get to carry over any unused credit that remains from the estate of the first spouse to die. Since there is still an unlimited marital deduction, that means that most surviving spouses will have a $10 million exemption for their estate.

This is all very good news for the vast majority of people. It means that a simple will or trust, along with Powers of Attorney for Healthcare and Finances, along with a Directive to Physicians is all they will need.

At least until 2013.

Unfortunately, these laws are only for 2011 and 2012. Once again, no one knows how this will change in 2013 and we are left with uncertainty beyond the next two years. The possibilities are:

  • Congress could allow the new law to sunset as it is scheduled to do on December 31, 2012, and then a $1,000,000 estate tax exemption and 55% estate tax rate will kick back in on January 1, 2013.
  • Congress could extend the 2010 law in 2013 and beyond and tax exemption would remain at $5,000,000 and the estate tax rate would remain at 35%.
  • Congress might pass some form of an estate tax compromise which will lower the estate tax exemption and increase the estate tax rate to something more in line with the 2009 numbers of $3,500,000 and 45%. This may also include repeal of portability of the estate tax exemption between spouses which is in effect for the 2011 and 2012 tax years.
  • Last but not least is for Congress to completely repeal the federal estate tax. Though not considered likely, there is an increasing number of republican congressmen who have indicated support for the complete repeal of the estate tax.

For now, it is time for anyone who does not at least have a simple estate plan in place to call their attorney and complete the simple documents mentioned above. A simple estate plan can cost as little as $300 for an individual and $500 for a couple and is very important for everyone to have, so don’t delay this important decision any longer.

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