How the New Estate Tax Exclusion Affects Your Estate Plan

In 2001, Congress passed a law that made big changes to the estate tax.  It raised the amount that could pass without tax, increasing it in steps from $675,000 in 2001, to $3.5 million in 2009.  Then, in 2010, the estate tax was repealed for one year only-2010.  The same law also said that the estate tax would return in 2011, with estates over $1 million being taxed as high as 55%. However, on December 17, 2010, Congress revised the estate tax with yet another new law: the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“TRA 2010”).  The new law set the amount that could pass without tax at $5 million per person for 2010-2012.  However, the new law is temporary and will expire after 2012.  In 2013, the amount that can be passed free from tax will go back down to $1 million per person.  Thus, unless the law is changed again between now and then, someone dying in 2013 would only be able to pass $1 million without an estate tax. In addition, the new law reduces the top estate and gift tax rate to 35% in 2010-2012.  However, a top rate of 55% returns in 2013 and thereafter.

Congress also introduced a new “portability” provision.  This is where one spouse can add their deceased spouse’s estate tax exclusion to their own exclusion, to shelter more from taxes. This portability provision, also known as the “Deceased Spousal Unused Exclusion Amount” can be used to shelter the assets of the surviving spouse.  While intriguing on the surface, under current law this portability tax benefit only happens if both spouses die in 2011 or 2012.  If either spouse hangs on until 2013 or beyond, there is no portability option available. Therefore, unless both spouses plan on passing away during those two years, creating an estate plan is still essential. Contact our office to learn more about how the portability provision could affect your estate plan.

So, what’s the gist of the new law? Prior to TRA 2010 we were facing a return to the $1 million estate tax exclusion on January 1, 2011. Now, we are still facing a return to the $1 million estate tax exclusion; it’s just put off for two years now–to January 1, 2013. The bottom line is that TRA 2010 is temporary. In two years, it will disappear as though it had never existed.

While planning to minimize or avoid estate taxes is certainly an important reason to meet with an estate planning attorney, creating an estate plan is about much more than protecting your beneficiaries’ inheritance from estate taxes.  Planning for your estate and your legacy can protect your beneficiaries and the assets you leave them from their creditors, a future divorce, and even their own misjudgment. Estate planning is also about providing protections during lifetime, such as avoiding a guardianship or conservatorship proceeding if you’re incapacitated and protecting your nest egg from the possibility of an extended stay in a nursing home.