One of the primary objectives of estate planning is to position assets in an optimal manner in an effort to avoid asset erosion. One of the most significant sources of asset erosion is the estate tax, so it is important to understand whether or not you are exposed to it so that you can take the necessary steps to mitigate that exposure if necessary. This is a little bit easier said than done because the estate tax parameters are always changing, so we would like to take a look at the present parameters of the estate tax here.
2010 was actually a very interesting year for estate planning attorneys because of the uncertainty that existed throughout the year regarding the future of the estate tax. The tax was repealed for 2010, but in 2009 the estate tax exclusion was $3.5 million and the maximum rate was 45%. So, if your estate was worth less than $3.5 million you were not exposed to the tax. However, upon the expiration of the Bush era tax cuts at the end of 2010 the estate tax was scheduled to return with a maximum rate of 55% and a $1 million exclusion. If this was to take place, all of a sudden estates that were valued at over $1 million would be facing a 55% federal levy.
This scenario never came to fruition due to the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 in the middle of December. Due to provisions contained within this act the estate tax exclusion is now $5 million, and the maximum rate of the tax is 35%. The gift tax is unified with the estate tax, and it too now carries a $5 million exemption and 35% rate, as does the generation skipping transfer tax. In addition, as a result of this measure the estate tax exclusion is now portable. This means that if you were to pass away your surviving spouse could utilize the estate tax exclusion that was due to you.
A federal levy that will take over a third of the taxable portion of your estate is certainly not something that a lot of people are going to welcome. However, the current parameters do represent an improvement over what we would have seen had no new legislation been passed.