After months of speculation on what would happen regarding the estate tax, Congress finally passed an extension of the 2001 tax cuts and provided some guidance as to the future of the estate tax. As we have discussed before, the estate tax had disappeared completely in 2010, but was scheduled to come back in 2011with higher tax rates and lower exemption levels than had been in effect in 2009.
Had the recent tax bill not been passed and signed by the President by January of next year, estate tax rates were scheduled to reemerge at about 55% with a $1 million exemption amount. Under the new deal, the tax rate will be set at a max of 35% and will allow an exemption of up to $5 million.
The new bill also contains a number of provisions affecting gift taxes, generation-skipping transfer taxes, and unexpected new provisions regarding portability of exemptions. The concept is somewhat complex, but essentially a spouse may be able to combine their exemption amount along with the unused exemption amount of their deceased spouse when they pass on their estate.
As for 2010, the year without an estate tax many not really be a year without an estate tax. The estate tax is being applied retroactively to 2010, but individuals are being given an option to either pay the estate tax, or opt for other types of taxes consequences related to capital gains and the value of assets.
While these new developments finally provide some certainty in making estate planning decisions, keep in mind that this latest bill is essentially just a two-year extension of tax cuts and short-term fixes for the estate tax. Within the next couple of years, we may have to deal with these same issues all over again.
Source: NJ.com, Holiday tax bill is law – help for rich and poor, 12/17/10