Toward the end of last year the topic that was on everybody’s mind within the financial planning community was that of the possible sunset of the tax cuts that were part of the Economic Growth and Tax Relief Reconciliation Act of 2001. If they were to expire, the estate tax would be carrying a $1 million exclusion and 55% maximum rate, which were the numbers that were in place back around the time that the Bush tax cuts were initially passed and signed into law.
As a result of the enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (which could be called the “Obama tax cuts” or the “extension of the Bush tax cuts” depending on your political preference), the estate tax exclusion was raised to $5 million and the rate of the tax is now 35%. In addition to these major changes the gift tax and the generation-skipping transfer tax are also carrying a 35% rate and a $5 million exemption.
Another change to the tax code that is included in the new legislation involves the portability of the estate tax exclusion. In this context the term “portability” refers to the ability of a husband or wife to use the estate tax exclusion of his or her deceased spouse. The estate tax exclusion is now portable, but when it was not the exemption of the deceased spouse was preserved by the creation of a bypass trust.
So bypass trusts are no longer necessary, right? This may be true if we knew for sure that the portability of the estate tax exclusion was permanent, but we have no such assurances. This new tax act will sunset at the end of 2012 in just the same manner that the Bush tax cuts were to sunset at the end of 2010.
We will have another round of political wrangling as the 2012 election season gets into full swing. So in light of the uncertainty going forward it is probably a good idea to consult your estate planning attorney before you get too attached to the idea of making changes specifically because of the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.