It's hard to believe that 2011 is right around the corner. The end of the year has brought a change to the federal estate and gift tax which adds some simplicity, but also leaves a lot of open questions.
As you may know, last week the President and Congress worked to enact a tax compromise. In part, the compromise impacts estate and gift tax planning. 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 that you not defer important estate planning matters while waiting for future legislative guidance. Instead, we recommend that you take whatever estate planning steps are necessary to preserve your assets and protect your family and loved ones. At Tydings, our estate planning incorporates the flexibility needed to address our clients' needs regardless of what course of action Congress ultimately takes.