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Finally a New Estate Tax Law – But What Does it Mean?

Unlike last year, when Congress tried to pass a law preventing the no estate tax in 2010 scenario, this year it did manage to pass a law extending the Bush era tax cuts that went into effect in 2002 but were set to expire on December 31, 2010.  So what does that mean for next year and beyond?

 Well, first of all, the new law is yet another temporary solution, this time for 2 years.  So, we might be right back here again in December 2012.  Nevertheless, the changes come as a bit of a surprise.  To review, had there been no change the federal estate tax would have returned next year for estates greater than $1,000,000, with a tax rate of 55%.  There had been some talk about going back to an exemption amount of $3,500,000, which was the case in 2009.  Instead, President Obama signed into law an exemption amount of $5,000,000 and a tax rate of 35%.

 For a married couple, with tax planning through the use of a credit shelter trut, that means they can transfer as much as $10,000,000 without paying federal estate tax.  Not bad.  Keep in mind, however, that many states have their own estate tax which remains unaffected by this new law.  New Jersey residents owe tax on estates greater than $675,000 and New York residents on estates greater than $1,000,000.

 What is somewhat surprising, however, is that the federal gift tax exclusion is once again unified with the estate tax.  Over the last 9 years, as the federal estate tax exemption kept increasing, the lifetime gift exclusion remained at $1,000,000.  In 2011, however, the gift tax exclusion will go up to $5,000,000.  The gift tax rate will be 35%, the same as the estate tax rate.

 So, what does this all mean for you and me?  For one thing, most estates will escape federal estate tax but estate planning will still be necessary to minimize, or in some cases completely avoid, state estate taxes.  Secondly, there are significant reasons to consider gifting more than the $13,000 per person per year annual gifts, now that $5,000,000 of gifts are exempt.  It might be a good idea to take advantage of the huge gift exclusion which may or may not be available beyond the next 2 years.  What remains unchanged is the specter of long term care.  Before one considers any gifting a carefully crafted long term care plan must be in place.