The Lesser-Known Tax

It’s tax season yet again – a time where we struggle to complete our income tax filings by the April 15 deadline. However, this article will not address any last-minute income tax tips; rather, we will explore the world of a lesser-known tax –  the estate tax.  

Without perhaps too much fanfare, our federal Congress made some significant changes to the estate tax law within the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (TRUIRJCA) passed last December.   Had Congress failed to act prior to the close of the year, the provisions of the 2001 tax law known as the “Economic Growth and Tax Relief Reconciliation Act” (EGTRRA) would have expired, resulting in a return to an earlier tax law where the asset threshold was $1 million and the maximum tax rate was 55%.   

So what does all this mean? Well, if there is a death in 2011 or 2012, and the decedent’s assets are less than $5 million, then there is no federal estate tax.  For estates in excess of $5 million, the maximum tax rate is 35%. In addition, there was a repeal of carry-over basis and reinstatement of stepped-up basis, a restoration of unified credit against gift tax for gifts, and an option to a surviving spouse for the portability of the Deceased Spouse’s Unused Exclusion Amount (DSUEA).   And if the decedent’s favorite color was green, there is a tax surcharge of 10% unless the date of death is Sunday or a day with the number “1” in it. Just kidding – well, at least for the last part.  

These new federal tax provisions are actually a temporary tax relief, effective for 2 years, with the hope that Congress will address these estate tax issues in a more permanent way. Until the close of 2012, we do know that most estates (individuals under $5 million and couples under $10 million in assets) will avoid federal estate taxes. So, good news for most, as the concern for paying up to 55% in taxes is at least temporarily relieved.  

However, these are just federal taxes, and it is still important to consider the existence of any state estate taxes, as many have lower thresholds than the federal markers. In Vermont, we have a lower threshold of $2.75 million for 2011, and $3.5 million for 2012. Other states, such as Massachusetts, levy taxes on estates with assets at $1 million or more.  

While some progress has occurred, the estate tax picture is still not entirely clear. Federal relief is temporary, and states still scramble to meet budget deficits. And we didn’t even fully explore TRUIRJCA, DSUEA, nor even address QTIPs and state tax decoupling! Hopefully, we’ve learned something about estate taxes. In any event, perhaps finishing that simple income tax return won’t seem so painful!  

Jennifer R. Luitjens is Certified as an Elder Law Attorney (CELA) by the National Elder Law Foundation, a non-profit organization accredited by the ABA. She lives in Jericho and practices in South Burlington with the Jarrett Law Office. This article is for informational purposes only and is not intended to constitute comprehensive or specific legal advice. The author stresses the need to engage appropriate legal and financial professionals when devising your individual estate plan.