The Revised Estate Tax

The tax cuts in 2001 by Bush lowered estate taxes over 10 years. These cuts brought the existing estate tax rate from a high of 55% to 35% over a 10-year period. The 35% estate tax rate was to stay in effect through the end of 2009. Then, estate taxes were set to disappear in 2010 and finally return to pre-tax cut levels at the start of 2011.

Now, there are changes that have taken place for tax years 2011 and 2012. The new law sets the federal estate tax rate at a flat 35%. In addition to this lowered rate, there are additional benefits: The number of people affected by the estate tax are reduced as estates under $5 million are not subject to any taxation. The limit was previously $3.5 million. The $5 million estate tax exemption is now portable, which allows for easier post-death planning. After the death of the first spouse, any unused portion of the spouse’s $5 million exemption may go into the other spouse’s estate. ?The bill now increases the total lifetime exclusion for gift giving to $5 million (previously $1 million), but unifies the estate gift and generation skipping taxes. So, if a taxpayer leaves $4 million to a generation skipping trust for grandchildren at death, then $1 million would be left for exemption. If someone gives away $5,000,000 tax-free during their life, then the entire estate is taxable.

This revision also gives estates of 2010 the choice of whether to use 2010 or 2011 estate tax rules.This is important because even though in 2010 there was no estate tax, there was a change in the capital gains tax of the estate. Prior to 2010, estates got a stepped-up cost basis (value to current market) for any assets in the estate. Thus, a property bought 20 years ago for $100,000 that is worth $500,000 today, would go into the estate as $500,000. But, in 2010, it would go into the estate at $100,000 and the heirs would have to pay a capital gains tax on the difference.

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