As you may know, last week the President and Congress worked to enact a tax compromise. In part, the compromise impacts planning for gift and estate taxes. For tax years 2011 and 2012, the federal estate tax exemption will increase to $5.0 million per individual ($10.0 million per married couple) with a maximum estate tax rate of 35%. This is the combined highest exemption amount and the lowest estate tax rate there has ever been since the enactment of the estate tax. However, after 2012, the federal estate tax will return to an exemption of $1.0 million and a 55% top tax rate.
The gift tax exemption is also being “reunified” with the estate tax exemption. Therefore, effective January 1, 2011, the combined gift and estate tax exemption is $5.0 million (prior thereto the gift tax exemption was only $1.0 million). The gift tax exemption will also revert to $1.0 million after 2012. Individuals with taxable estates will want to consider making gifts in 2011 or 2012 to take advantage of the increased exemption amount.
Another highlight of the tax compromise is the portability of exemption amounts. Effective January 1, 2011, a deceased spouse’s unused federal estate tax exemption may be used by the surviving spouse’s estate in addition to that individual’s exemption. However, as with the estate and gift taxes, the sunset provision of the statute makes it likely that this provision will expire on December 21, 2012, unless Congress acts to extend the provision further.
We now know what the estate tax laws will be for the next two years; after that, there is uncertainty. In the midst of the uncertain future of estate taxation, we recommend donors and prospects not defer important estate planning matters while waiting for future legislative guidance. Instead, we recommend to clients that their donors take whatever estate planning steps are necessary to preserve their assets and protect their family and loved ones.