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The Federal Estate Tax Exemption: “Use it or Lose it in 2012?”

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Written By: Attorney Matthew J. Parker

As part of the 2010 extension of the tax cuts under the Economic Growth and Tax Relief Reconciliation Act (known as EGTRRA), the politicians in Washington agreed to raise the Federal Estate Tax exemption to $5 million dollars. The exemption allows a $5 million dollar estate to pass to beneficiaries free of Federal Estate Tax.  Amounts above the $5 million dollar exemption are taxed at the rate of 35%.

The $5 million dollar exemption also applies to Federal Gift Tax.  Prior to the new law’s enactment, each individual could give away up to $1 million dollars during their lifetime free of federal Gift Tax.  Under the new law, individuals may give away up to $5 million dollars during their lifetime without imposition of the tax.

These changes are not permanent. They are effective until December 31st of this year. Unless Congress acts before this “sunset” date, the tax rules will automatically revert to the rules of 2001 – with Federal Estate and Gift Tax exemptions of only $1 million dollars per person.

The $5 million dollar exemption provides wealthy individuals, such as gas lease owners and business owners, with tremendous opportunities to reduce transfer taxes. However, in light of the sunset provisions and the potential for gridlock, they need to take advantage of these opportunities while they last. Unfortunately, the current but temporary high exemption levels have lulled a lot of people into inaction. The number of clients seeking estate tax avoidance planning has dropped significantly since the change in the law.

President Obama’s 2013 Budget Proposal would return the Federal Estate Tax and Gift Tax rates back to 2009 levels.  The top tax rate would be 45% and the exemption amount would be $3.5 million with only $1 million exempt from gift taxes. The President would also do away with various popular estate planning techniques. Therefore, those considering the transfer of wealth to the next generation need to consider making those transfers in 2012 as these generous exemption figures may soon be gone.

You can also view a portion of Attorney Parker’s Professional Update presentation on the “Gridlock of Doom for Federal Estate Tax Planning