Congress has finally approved legislation regarding the federal estate tax, and President Obama signed it into law last week. The legislation, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, relieves many people of the concern that their estates may be subject to federal estate tax in 2011. The estate tax, which was repealed in 2010, was set to come back in 2011 with an exemption of only $1 million per person, and a maximum rate of 55% for assets in excess of $1 million. Because a person’s assets for estate tax purposes include all his or her property, including real estate, retirement accounts, and life insurance, among other assets, this new low exemption amount would have affected a substantial number of individuals.
The new legislation, however, raises the exemption for each person to $5 million, and lowers the maximum tax rate to 35%. The new exemption is also “portable”–meaning that if one spouse does not use his or her entire exemption at his or her death, the second spouse can use what was left of the first spouse’s exemption at the second spouse’s death. (For example, if Jane dies with $2 million in assets, her husband, Jack, will have a $8 million exemption available to him under the new law). This “portability” was not available under prior law.
This is great news for people who might have been subject to estate tax if the exemption had dropped to $1 million per person. There is a catch, however–these changes expire on December 31, 2012. After that, the tax is set to revert back to the $1 million exemption and 55% maximum rate again. Many expect that Congress will act to change the law again before that happens, though.
Confused yet? For many people, it is possible to create an estate plan that will help avoid unnecessary taxes regardless of the changing exemption levels, and not need to be revised every time Congress changes its mind about the estate tax. Consult with an estate planning attorney for the best course of action for your situation.