Exemption Planning

State of the Estate Tax

Many clients are concerned about the possible taxation of their estate upon death.   Estate planning methods are available to clients seeking to avoid/minimize estate taxes, but the shifting legislative landscape makes planning a challenge.   Let’s review recent developments regarding the federal estate tax, and examine current estate tax law.

In 2001, Congress passed estate tax legislation that resulted in an increasing exemption amount over time.  For example, the exemption increased in increments from $675,000 in 2001 to $3.5 million in 2009.  The exemption (often referred to as the “applicable exclusion amount”) is the amount of wealth (including life insurance proceeds, retirement benefits, etc.) that an individual can pass free of federal estate tax to his/her loved ones.  The 2001 legislation provided that 2010 would be a year without a federal estate tax, absent further Congressional action.

On December 17, 2010, the President signed legislation that set the estate tax exemption at $5 million for 2010 through 2012.  (For 2010, an estate can opt out of the new law, but must then limit its ability to adjust cost basis.)  Moreover, the exemption is now transferable (“portable”) between spouses, effectively providing married couples with $10 million of federal estate tax exemption*.  If Congress fails to revisit this issue prior to the end of 2012, the estate tax exemption will drop to $1 million on January 1, 2013.

Given the volatility of federal estate tax law, you should stay apprised of any changes to the law that might cause you to re-examine your estate plan.

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* For purposes of this summary, it is assumed that the spouses are U.S. citizens..