Because we do not know what the future will give us regarding estate taxes, we have to continue to plan for changes that may impact our client’s future, yet unknown, financial situations. Congress took its time enacting the current estate tax, and it is applicable for a short window of time. A breakdown of the current estate tax law is as follows:
- New and unified estate tax, gift tax and generation-skipping transfer tax exemptions and rates.For 2011 and 2012, the federal estate tax exemption will be $5 million and the estate tax rate for estates valued over this amount will be 35%. The estate tax has also become unified with federal gift and generation-skipping transfer taxes such that the gift tax exemption and generation-skipping transfer tax exemption will be $5 million each and the tax rate for both of these taxes will also be 35%.
- Offers “portability” of the federal estate tax exemption between married couples. In 2009 and prior years, married couples could pass on two times the federal estate tax exemption by including “AB Trusts” in their estate plan. The new law eliminates the need for AB Trust planning for federal estate taxes by allowing married couples to add any unused portion of the estate tax exemption of the first spouse to die to the surviving spouse’s estate tax exemption. What this means is a married couples can pass $10 million on to their heirs free from estate taxes with absolutely no additional planning. Be advised, however, the portability was not applied retroactively to January 1, 2010, and as it now stands is only available for deaths that occur during the 2011 and 2012 tax years.
Estate Planning attorneys have no choice but to continue preparing martial “AB Trusts” for the future unknown. It could be possible for your average middle class family to become subject to an estate tax, depending on what it is. For example, if the federal estate tax exemption reverts to $1 million per person, many people will be subject to the estate tax. If an individual owns a home valued in the mid-$200,000 and owns a $1 million term life insurance policy, they will owe estate tax on $200,000. Life insurance, while normally exempt from tax, is valued to determine the size of the overall estate. As it stands, we do not know what the exemption amount or tax rate will be after 2013.
For example, here is a recap of the legal changes since 1997: