2010 was a midterm election year, and it also happened to be the year when the Bush era tax cuts were set to expire. So there was a lot of political debate taking place regarding the potential extension of the Bush cuts, and these discussions included the estate tax parameters.
To provide some background, throughout the 2010 calendar year the estate tax was repealed, but in 2009 the top rate of the tax was 45% and the exclusion was $3.5 million. However, in accordance with the laws as they existed throughout the year the exclusion would be reduced to $1 million and the rate of estate tax would come in at 55% if no new legislation was enacted.
On December 17 the president signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 into law. This extended the Bush era tax cuts, reduced the Social Security payroll tax for one year, and impacted the estate tax quite significantly. Rather than reverting back to the 2002 exclusion of $1 million and the 2001 top rate of 55%, the estate tax exclusion is now $5 million per person and the max rate of the tax is 35%.
In addition, the estate tax exclusion is now portable between husbands and wives which is something that on the surface could make the creation of bypass trusts unnecessary in some cases. However it is important to read the fine print when you are considering these new estate tax parameters.
In the same manner that the issue of the estate tax was a political football during an election year in 2010 we’re likely to see an encore performance in 2012. This is because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 sunsets at the end of 2012 in the same manner that the Bush tax cuts were to sunset at the end of 2010. So before you start to alter your estate plan based on these new parameters you may want to consider the fact that the changes are not permanent, and what make sense today may not make sense on New Year’s Day in 2013.