The return of the estate tax in 2011 has been a hot topic among estate planning attorneys throughout 2010, and to understand the matter you need to absorb some background information. Due to a provision in the Economic Growth and Tax Relief Reconciliation Act of 2001 (commonly referred to as the “Bush tax cuts”) the estate tax was repealed for 2010. When it was last in place in 2009 the exclusion amount was $3.5 million. This means that if the overall value of your estate was less than this amount your heirs would owe no federal estate tax at all. Any portion that exceeded $3.5 million would be subject to a 45% tax.
As the law stood throughout 2010, the estate tax was scheduled to return in 2011 with a $1 million exclusion and a maximum 55% rate of taxation. So if the value of your estate was somewhere between $1 million and $3.5 million it was going to be subject to a federal levy in 2011 when it was completely immune to the estate tax in 2009 and 2010. This is a matter that legislators were discussing throughout the year. Though estate planning professionals were aware of the possibility of legislation altering these parameters, all we could do was work with the law as it existed and keep a close eye on the matter as it unfolded.
Ultimately, there is some good news to report on this day. Congress has passed a bill that will extend the Bush tax cuts and add some additional savings for the American taxpayer via a significant reduction in Social Security taxes. The estate tax burden has been lessened as well. Rather than being reduced to just $1 million, the estate tax exclusion will be $5 million in 2011, and instead of a 55% levy, the top rate of the estate tax will be 35%.
Since these changes are going to impact a lot of estates, it would be a good idea to get together with your estate planning attorney early in the year to review your existing strategy in light of this new legislation.