We all heard about the big tax relief legislation that made its way through Congress late last year and was eventually signed into law by the president on the 17th of December. The Bush era tax cuts were extended, unemployment benefits were extended, and the Social Security payroll tax was reduced by about a third, and these were the focal points that got the most attention in the media. However, there were also some components to this measure that had a profound impact on estate planning, and they have really changed the playing field for the next couple of years.
Many people are aware of the fact that the estate tax was repealed for 2010, but it was scheduled to return in 2011. Under the law as it existed before this eleventh hour legislation was enacted the exclusion was going to be $1 million and the maximum rate of taxation was going to be a somewhat incredible 55%. When the tax was last in effect in 2009 the exclusion was $3.5 million and the top rate was 45%, so a lot more estates were going to be vulnerable and the bite was set to increase by 10%.
Fortunately the recently passed Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 changed those numbers considerably. In 2011 and 2012 the estate tax exclusion amount has been raised from the $1 million that was anticipated up to $5 million. This is a per-person exclusion so a married couple may now pool their respective exemptions and have a $10 million estate tax buffer.
In addition to the raise in the exclusion, the maximum rate of the tax has been reduced. Rather than the 55% that had been scheduled, any portion of an estate that exceeds the $5 million exclusion will be taxed a rate of 35%. This is no tax holiday, but at least the government will now be allowing your heirs to receive more than is taken from them should a portion of their inheritances be subject to the estate tax.