Estate Tax Update – What is New for 2011?

On December 17, 2010, the current uncertainty about what was going to happen to the Federal Estate tax ended when the President signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

The following is a summary of the recent changes to the Federal estate tax law.  It is important to note that the Massachusetts estate tax has not changed and continues to apply to all estates that are in excess of $1,000,000.  The Massachusetts estate tax rate ranges from as low as .8% to a top rate of 16% on estates over $10,000,000. A Massachusetts taxable estate of $2,000,000 would pay an estate tax in Massachusetts of approximately $100,000.

For 2010 the Federal estate tax exemption was unlimited.  This meant that no matter how much you were worth if you died in 2010, you did not pay any estate tax.  Without the changes that were signed into law on December 17, 2010, the Federal estate tax was scheduled to apply to all estates over $1,000,000.

With the enactment of the new Federal Estate Tax changes, the following applies to 2011 and 2012:

  • In 2011 and 2012, the estate tax exemption amount will be $5 million per person (the $5 million will be indexed for inflation in 2012).  This means that only individuals with estates over $5 million will have to pay Federal estate tax.  The top estate and gift tax rate for these years will be 35%.
  • Beginning in 2011, the gift tax (reunified with the estate tax) will have a $5 million dollar exemption amount; the generation-skipping transfer tax, with a $5 million exemption effective January 1, 2010, will have a 0% tax rate for 2010, and a 35% rate for 2011 and 2012.
  • For 2011 and 2012, when one spouse dies, any unused portion of that spouse’s estate tax exemption amount may be transferred to the surviving spouse.  This means that for a married couple, the surviving spouse can have an estate of up to $10 million and not pay estate tax if the first spouse to die did not us any of the estate tax exemption.

For those individuals with estates in excess of $1 million, the changes that were enacted on December 17, 2010 are very good news.  The above changes are only temporary measures and uncertainly continues over what will happen after 2012.  The best way to maximize the amount of money that you can pass on to your heirs tax free is to consult with an attorney who is familiar with both the Massachusetts and Federal estate tax provisions.

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