The last few years have been very difficult for estate planners, because we have not known what the federal estate tax situation is going to be in the future. On December 17 last year the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 raised the federal estate tax and the federal gift tax exemption to $5,000,000 and dropped the top tax rate from 45% to 35%, for 2011 and 2012.
The Super Committee, created by the Budget Control Act of 2011, has been working on a number of changes in the income tax and estate tax laws. What the Committee proposes may give us an indication of what Congress will ultimately do when it considers the future of the estate tax.
We will not know what the state of the law will be until Congress acts, which could be a good while from now. However, I will hazard a guess.
It is likely that the estate tax exemption will be set at $3,500,000, as it was in 2009. This is a safe bet for members of Congress because they can simply say that they have left the exemption where it was before the passage of the 2010 Act, which was intended only as a stopgap.
If a spouse has died this year, a federal estate tax return should be filed to protect against the possibility that Congress reduces the exemption to $1,000,000.
Under the present law, any unused exemption in the estate of a deceased spouse may be carried over and used in the estate of the surviving spouse when he or she dies. To preserve this carryover, it is essential to file a federal estate tax return in the estate of the first spouse to die, even though it is clear that there will be no tax in the first estate and it appears likely there will be no tax in the second estate.
Congress may reduce the federal gift tax exemption to $1,000,000. Thus, anyone wishing to make substantial gifts should do so this year, while the exemption remains $5,000,000.
I expect to see the exemption period for generation-skipping transfers limited to two years. If this occurs, dynasty trusts will no longer be attractive.
