In estate planning circles, one of the big stories in 2010 was the fact that the Bush era tax cuts were set to expire at the end of the year. If this was to take place, the estate tax exclusion would have reverted back to the $1 million that was in place in 2002, and the maximum rate of the tax would have returned to the 55% that was in place in 2001. To put this in some perspective in 2009, the last time the estate tax was in effect, (it was repealed for 2010) the maximum rate of the tax was 45% and the estate tax exclusion was $3.5 million.
As a result of the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010), the estate tax exclusion was raised to $5 million, and the maximum rate of the tax is now 35%. In addition, the generation-skipping transfer tax and the gift tax also carry a $5 million exemption and a 35% rate.
Another provision that is contained in this measure that impacts estate planning involves the portability of the estate tax exclusion. In this context, the term “portability” refers to the ability of a surviving spouse to use the remaining exemption that his or her deceased spouse was entitled to. Prior to the passage of this legislation, the estate tax exclusion was not portable, and estate planning attorneys would respond to this by recommending the creation of bypass trusts. But as a result of the new law, the estate tax is now portable, which would make it seem on the surface that bypass trusts for this purpose are no longer are necessary.
However, it is important to understand the fact that the changes that have taken place due to the passage of this measure are not permanent. In the same manner that the Bush era tax cuts were scheduled to expire at the end of 2010, this new act will expire at the end of 2012. If it does, the estate tax inclusion will once again be $1 million and the maximum rate again will be 55%, and there are no guarantees with regard to the continued portability of the estate tax exclusion. Therefore, it would be a good idea to tread lightly and keep in contact with your estate planning attorney with regard to the prudence of any estate plan alterations at this time.