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Estate Planning: Congress Increases Tax Exemptions and the Opportunity for People to Share Them

Last December Congress enacted estate tax legislation that substantially increases exemptions and the opportunity for married couples to share them. Unfortunately, the new law expires at the end of 2012, again creating uncertainty for estate tax planning beyond the near term.

Under the new legislation, each individual estate is exempt from federal estate tax up to $5 million. Any excess is taxable at a rate of 35%. Moreover, as a significant expansion of availability, the exemption is “portable” between spouses. That is, if the first spouse to die does not use all his or her $5 million exemption, the unused portion is available for the estate of the surviving spouse, in addition to the $5 million exemption already available for the surviving spouse.

Essentially what Congress has done is revive and revise, at least temporarily, the estate tax structure that had been in place since 2001 and that had expired at the end of 2009, leaving no estate tax in 2010. Had Congress failed to act last December, the estate tax exemption would have returned to $1 million this year, with higher top rates and no portability.

As with the previous estate tax structure, if Congress fails to act again on this issue before 2013, the exemption will drop to $1 million and top rates will rise.

For people facing potential exposure to federal estate tax, the two-year law at least provides a likely opportunity to make large gifts in order to reduce their estates now under the high exemption so as to avoid or reduce estate taxes in the event the $5 million exemption is reduced in 2013.

For more information, please contact Jay Merwin at merwin@bowie-jensen.com.

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