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February 28 2011

New Estate and Gift Tax Legislation

In 2001, Congress passed tax legislation that increased the estate tax exemption from $1,000,000 over several years through 2010 when the estate tax was repealed for one year. The estate tax exemption and rates changed as follows:

Year - Estate Tax Exemption, Maximum Estate Tax Rate

2001- $1,000,000, 55%
2002 -$1,000,000, 50%
2003 - $1,000,000, 49%
2004 - $1,500,000, 48%
2005 - $1,500,000, 47%
2006 - $2,000,000, 46%
2007 - $2,000,000, 45%
2008 - $2,000,000, 45%
2009 - $3,500,000, 45%
2010 - 0, 0%
2011 - $1,000,000, 55%

There were not enough votes in favor of the 2001 legislation to make the repeal of the estate tax permanent. The law stayed in effect for 10 years and unless Congress took action, the estate tax would return in 2011 with the same exemption amount and rates as were in effect in 2001 ($1,000,000 exemption and a top rate of 55%). In December, Congress finally passed the “Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010.” Part of that Act provides for a $5,000,000 estate tax exemption per person and a top estate tax rate of 35%.

The new law also makes the estate tax exemption “portable.” This means that if a married person dies and does not use his or her entire exemption amount, the remaining portion can be used by the surviving spouse later in addition to the exemption of the surviving spouse. In the future, this may avoid the necessity of spouses having to create separate trusts in order to minimize estate taxes. In addition, under the previous 2001 Tax Act, the lifetime gift tax exemption, had remained at $1,000,000 per person. Under the new Act, each person now has a $5,000,000 lifetime gift tax exemption.

The 2010 Act, however, is only in effect for 2011 and 2012. Further action by Congress will be required and is somewhat unpredictable. For those individuals and married couples with substantial estates, the next two years may provide a good opportunity to make large gifts to children or grandchildren to take advantage of the increased gift tax exemption. For those married couples with separate trusts to minimize estate tax, it may make sense to keep them in place for a couple of years at least until more permanent legislation provides more certainty.

We recommend that you take the new Act into account for your estate plan. If you would like your estate plan reviewed in light of the new Act, please contact our office.

Neil L. Kimball
Neil P. Jansen
James F. Scales
Benjamin A. Zainea
Amy L. VanDyke
Stephen J. Mulder
Daniel J. Kozera, Jr.

Related Newsletters
"New Estate and Gift Tax Legislation Client Alert," 2/28/2011