Estate Tax: Now We Know, At Least For A Little While

The new tax law Congress recently passed provided some much needed clarity concerning the estate tax. Here is a brief summary of the legislation:

1. The estate tax is reinstated for 2011 and 2012. There is now one single rate of 35% and the exemption is $5million per individual.

2. A portability provision has been added to the estate tax law allowing the unused exemption from the first spouse's estate to be added to the surviving spouse's estate tax exemption. In reality, this allows most couples to recognize a $10million exemption without having to establish a Credit Shelter Trust.

3. The concept of carryover basis which replaced the estate tax in 2010 under the previous legislation has been done away with.

4. Everything is temporary. The new legislation only runs through the end of 2012. Congress will then have to decide once again how they want to handle going forward. With that said, many feel it will be difficult for Congress to lower the exemption since it has now been established at $5million per individual.

One of the unintended consequences of the legislation is likely to be a reduction in the establishment of Irrevocable Life Insurance Trusts (ILIT). ILIT?s were typically established to keep life insurance proceeds out of an individual's estate that might otherwise push them over the estate tax exemption. With the increase of the exclusion and the portability feature raising the combined exclusion for most couples to $10million, many Americans can now carry substantial insurance in their estate and still stay well below the estate tax threshold.

This is not intended as tax or legal advice. Tax law is subject to change. Investors should consult their tax advisor or legal counsel.