With the new year being upon us the ramifications of the changes to the tax laws are starting to sink in. To take a brief look at the back story, 2010 was a very interesting year in estate planning circles. Aside from the fact that the estate tax was repealed for that one year, there was a lot of uncertainty about the parameters of the tax going forward in 2011. If everything stayed the same, the estate tax exclusion in 2011 was going to come in at $1 million, and the maximum rate of taxation was set at 55%.
These numbers played havoc with many existing estate plans, because in 2009 the exclusion was $3.5 million and in 2006 through 2008 the estate tax exclusion was $2 million. So as the laws stood throughout most of the 2010 calendar year, estates that were valued anywhere between $1 million and $2 million were set to be subject to the estate tax for the first time in several years.
Simply swallowing the new numbers and planning pragmatically in spite of how you might feel about them wasn’t an easy option either. All year long there was talk in Washington about a possible extension of the Bush tax cuts, and along with this came suggestions of revisions in the estate tax parameters. So if you wanted to characterize 2010 from an estate planning perspective it would probably fair to call it the “Year of Uncertainty.”
As it turned out the legislation was passed and signed into law. The estate tax exclusion is now $5 million for individuals and the maximum rate of taxation’s is 35%. This is the banner news but there is another change in the laws it is worth mentioning.
Previous to 2011 if you died without using all or part of your estate tax exclusion it was not portable. In other words it was not transferred to your surviving spouse; it was simply lost. Due to a provision in the new law the estate tax exclusion is now portable. If a married person passes away his or her exclusion can be used by the surviving spouse. This long-sought after change will eliminate the need for bypass trusts in many cases and simplify the planning process for some taxpayers.