As the 2010 calendar year was winding down there was a lot of apprehension within the estate planning community about the estate tax parameters for 2011. The estate tax was repealed for 2010, but when it was last in effect in 2009 the exclusion amount was $3.5 million and the rate of the tax was 45%. Under the tax code as it existed throughout most of the year the tax was scheduled to return in 2011 with a reduced exclusion and an increase in the rate of taxation. The exclusion amount was to be just $1 million, and the maximum tax rate was set to be raised to a rather astonishing 55%.
Fortunately, the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 changed all of that for the better. Going forward in 2011 and 2012 the estate tax exclusion is now going to be $5 million, and this is a per person exclusion. So, a married couple could combine their respective individual exclusions to equal a total of $10 million.
In addition, the rate of the tax was changed as a result of this eleventh hour tax relief. It is hard to understand how you can possibly ask the American citizenry to pay a tax at a rate that takes more than it leaves, which is what would have happened if the existing parameters had remained in place. But this new legislation reduces the maximum rate of the estate tax from the 55% that had been on tap all the way down to 35%.
Though the changes are welcome, it is important to keep things in their proper perspective. A 35% tax on money that you have left over after you have carried a significant tax burden all of your life is no picnic. And if the overall value of your estate exceeds the exclusion you may wonder why you have to pay this 35% tax when others do not.
And most importantly, this law expires in less than two years. You should consult your estate planning attorney to find out how to best apply the new law to your situation.