2011 Estate Tax Changes

As most people know, Congress and the President have been debating whether or not to extend the current tax rates and applicable rates beyond the end of 2010. In a last-minute agreement, Congress agreed to extend the “Bush” tax cut through 2012. One of the key disagreements between members of Congress was the provision related to the Federal Estate tax, but ultimately, they passed the legislation, which contains new regulations for the Federal Estate Tax Law. While the tax will remain the same for 2011 and 2012, there are a few new additions to be noted.

Most notably, estates will now be able to claim a $5 million exemption per person or $10 million for couples. This exempts estates valued at less than $5 million from paying any Federal Estate Tax, which is dramatically different than the prior law that would have exempted only $1 million per estate. Second, the top tax rate for Estates, Gifts and Generation Skipping Tax will be capped at 35%, which is dramatically lower than the 55% top rate that would have applied under the prior legislation. Third, the $5 million exemption can also be used to shield gifts from Federal Gift tax as well, which is also different from the prior legislation that allowed individuals to make a maximum of $1 million in tax-free gifts during their lifetime. Fourth, individuals who died in 2010 can choose between the new tax laws or those that governed by the 2010 model. Finally, any of the unused $5 million exemption can be passed to the surviving spouse by the personal representative of the decedent’s estate, which provides a significant benefit different from the prior legislation that would have resulted in that unused exemption being lost.

These new changes will allow individuals more flexibility in managing their wealth and distributing it as they wish. For any unanswered estate planning questions, feel free to contact our office.