As part of the broad extension of the Bush tax cuts that the President signed in December, laws affecting estate planning were also extended and expanded through the end of 2012. Here’s a quick overview of the primary changes.
1. Increased Exemption Levels: The federal exemption level for estate taxes rose to $5 million per person and important changes were made to the gift tax laws. Lifetime gifts were previously limited to $1 million per person; now the gift tax exemption equals the estate tax exemption at $5 million, meaning there is no longer a gift tax penalty for making lifetime gifts (but capital gains tax impacts may still be a consideration). The result of these changes is that very few Vermonters will be subject to the federal estate or gift taxes for the next two years.
2. Portabilty: The new law allows a surviving spouse to apply their deceased spouse’s unused federal exemption amount to their own. For example, if John Doe dies without having arranged to protect his federal exemption, his surviving spouse Jane Doe may add John Doe’s exemption to her own, giving her a larger combined exemption amount. This is a welcome development in estate planning, but as with most new laws, it’s unclear how it will work in practice, and there are numerous rules to follow, including having the decedent’s executor make a special election on the decedent’s estate tax return, even if an estate tax return would not otherwise be due.
3. Vermont Estate Tax: Vermont’s estate tax exemption amount rose from $2 million to $2.75 million in 2011, and is scheduled to increase again in 2012. However, Vermont is unlike other New England states because it disallows special tax elections to postpone state estate taxes until the death of the second spouse in some circumstances, so it’s important to incorporate flexibility into your planning to address the unique Vermont estate tax issues.
4. Options for 2010 Decedents: Because of the absence of a federal estate tax in 2010, Congress made special accommodation for 2010 decedents. Under the new tax law, executors of the decedent may elect to apply the 2010 law as it existed before the new law passed, or apply the new exemption levels. Most people will benefit under the provisions of the new law, but the wealthy will have to run the numbers to see which approach makes the most sense.
Final Note: The new law is effective only through the end of 2012. No one knows what the laws will be after that, so estate planning remains in a state of uncertainty. Because of the ongoing uncertainty, your plan must build in flexibility where possible.