Time marches on as they say and in the field of estate planning the goal is to stay one step ahead as this steady march brings the inevitability of change along with it. But to look forward with our eyes on the future we must take a brief look backward for a moment. As you’ll recall there was a lot of debate in Washington DC regarding the extension of the Bush tax cuts that could include changes to the estate tax parameters around the end of 2010. Those talks came to fruition with the passing of the measure that became the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
This tax relief legislation extended the Bush cuts and reduced Social Security payroll taxes by nearly a third for this year. It also impacted estate planning quite profoundly, raising the estate tax exclusion to $5 million while reducing the rate of the tax to 35%. Had this bill not been passed the exclusion was set to return to the 2002 level of $1 million, and the max rate was to revert to the 2001 level of 55%.
There were some other changes included in this bill that impacted estate planning. One of these involves the portability of the estate tax exemption. In the past when you died the estate tax exclusion that was due to you died along with you. This unfortunate fact caused a need for the creation of bypass trusts. Under provisions included in the new law when a married person passes away his or her spouse can now utilize any unused portion of his or her deceased spouse’s unified exemption.
So now bypass trusts are unnecessary, right? The answer is not necessarily. It is important to understand that the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 will sunset at the end of 2012 in the same manner that the Bush tax cuts were set to sunset at the end of 2010. Right now we have no way of knowing whether or not portability of the estate tax exclusion will persist beyond 2012, and if no new legislation is passed we will once again be faced with a $1 million exclusion and a 55% max rate at the end of the 2012 calendar year. So the idea is not to elimate the bypass trust but to create an estate plan with maximum flexibilty to take into account the ever-changing tax laws.