How the New Estate Tax Exclusion Affects Your Estate Plan
In 2001, Congress enacted legislation that significantly altered the estate tax structure. The tax-free threshold rose gradually from $675,000 in 2001 to $3.5 million by 2009. The estate tax disappeared entirely for 2010, but the same legislation scheduled its return in 2011, with amounts over $1 million facing tax rates up to 55%.
Then on December 17, 2010, Congress modified the rules again through the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010). This legislation established a $5 million per person tax-free threshold for 2010 through 2012. But this change was temporary, set to expire after 2012. Starting in 2013, the tax-free amount would drop back to $1 million per person. Without further legislative action, anyone passing away in 2013 could only transfer $1 million tax-free. The legislation also lowered the maximum estate and gift tax rate to 35% for 2010-2012, though the 55% rate would return in 2013.
Congress also created a “portability” feature, allowing a surviving spouse to use their deceased partner’s unused estate tax exclusion in addition to their own. This provision, formally called the “Deceased Spousal Unused Exclusion Amount,” helps protect more assets from taxation. While this sounds beneficial, under the law at that time, portability only applied if both spouses passed away in 2011 or 2012. If either spouse lived past 2012, portability wasn’t available. This meant that unless both partners expected to pass away within those two years, establishing an estate plan remained crucial. Consider consulting our office to understand how portability might impact your planning.
What did TRA 2010 really accomplish? Before this law, the $1 million estate tax threshold was scheduled to return on January 1, 2011. After TRA 2010, that same $1 million threshold would still return, just delayed until January 1, 2013. Essentially, TRA 2010 provided temporary relief that would vanish after two years as if it never happened.
While reducing or eliminating estate taxes certainly matters when working with an estate planning attorney, creating your estate plan involves much more than shielding inheritances from taxation. Planning your estate and legacy can safeguard your beneficiaries and their inheritances from creditors, potential divorces, and poor financial decisions. Estate planning also provides lifetime protections, including avoiding guardianship or conservatorship proceedings if you lose capacity and protecting your savings from potentially lengthy nursing home costs.
