Window of opportunity: estate planning and estate taxes for 2011 and 2012.

• Author: Mecham, Thomas A.
• Position: Money Talk

What is the condition of your current estate plan? Is it rock solid? Anyone who endeavors to "complete" his or her estate plan soon learns estate planning is more of a process than a single event. This is because the estate planning process is governed by a complex set of laws that seem to be ever changing. The most recent example is the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 signed into law by President Barack Obama on December 17, 2010.

A Brief History

In 2001, Congress enacted the "Bush Tax Cuts," which included favorable changes for taxpayers to the gift tax laws (governing transfers during life) and estate tax laws (governing transfers at death). From 2001 through 2009, the amount taxpayers could pass at death, free of estate taxes, increased from $1 million to $3.5 million. In 2010, the federal estate tax or "death tax" was entirely eliminated, but only for 2010. Meanwhile, the amount which taxpayers could transfer by gift to beneficiaries during their lifetime held constant at $1 million from 2001 to 2010. The impact of the "repeal of the death tax" reached popular consciousness when George Steinbrenner, owner of the New York Yankees, died in 2010 leaving an estimated $600 million to his heirs free from federal estate tax.

Cowering under the glare of taxpayers angry at the expiration of the "Bush Tax Cuts" and the return to a $1 million federal estate tax exemption, Congress finally blinked. The 2010 Act includes generous increases to the estate and the gift tax exemptions, as well as many income and employment tax goodies. Ever willing to tantalize taxpayers, however, Congress made such changes effective only for the 2011 and 2012 calendar years. Special transitional rules for the estate and gift tax also were included for 2010.

Current Law

The key changes in the 2010 Act likely to affect your estate plan are: (1) an increased exemption amount of $5 million for transfers at death, (2) the "portability" of this exemption amount between spouses--a concept previously unknown but long sought after with respect to the federal estate tax, and (3) an increased exemption amount of $5 million for transfers during life, a 400 percent increase over the prior exemption of $1 million.

Each of these changes presents planning opportunities. With proper estate planning, married couples can now transfer up to $10 million free of estate tax. Assets transferred in excess of $5 million for individuals and $10...