The estate and gift tax is one of the most dramatic aspects of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (HR 4853). The estate tax provisions went into effect on January 1, 2010, but are only in effect for two years, meaning they will expire in 2013. Although it is widely predicted that the estate tax provisions will be extended, I would not be that sure. Numerous Democrats criticized President Obama for this aspect of the new tax law in particular, and vowed to not continue it once Democratic strength in Congress is a little bit (and they did mean only a little bit) greater.
Under the new estate tax, estates will not be taxed on the first $5 million of value. Because any unused portion of a spouse’s $5 million exemption is portable to the second spouse’s estate, a husband and wife together can pass tax-free $10 million to non-spousal heirs. Importantly, the gift tax is now unified with the estate tax, meaning the gift tax exemption is also $5 million. This $5 million replaces the $1 million per person limit that existed before January 1, 2011. Absent a new law, the $1 million exemption returns in 2013.
See this article for the new law’s estate tax provisions and strategies in light of the changes.
The possibility in two years that there will a $1 million estate tax exemption and a higher tax rate should cause most wealthy persons to give more money to prospective heirs now. Concerns about large lifetime gifts have not changed under the new law, but the tax rewards for dealing with this before 2013 arrives are worth dealing with these typical problems.