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Tax Deal Provides Some Guidance on Gift and Estate Tax

After much debate and political haggling, the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 was finally passed by Congress and signed by the President earlier this month. The compromise agreement does a number of different things, but has a few very important provisions for estate planning purposes.

Among the many highly anticipated provisions were those related to the future of the estate tax. Before the recent agreement, the estate tax was scheduled to come back into existence in 2011 after disappearing for one year. More troubling for many was the fact that estate tax was going to come back at much higher rates than it had been in several years.

Without the compromise, the estate tax was scheduled to return with a tax rate of about 55% and an exemption amount of only $1 million. However, the new agreement looks to be much more favorable to those that may have ended up paying the tax. Under the new agreement, the tax rate has been limited to 35% and the exemption amount has been raised to $5 million.

In addition to lowering the estate tax rate, this new law also affects gift taxes and exemptions as well as generation-skipping transfer taxes. There are also provisions dealing with how assets are valued for tax purposes when passed on. One thing to keep in mind with all of these changes is that the new agreement is really just an extension for two years. All of these provisions will be up for debate again sometime with the next two years.

Another issue that many were concerned with was how the estate tax would be handled for the heirs of those who died in 2010. It appears that those heirs may have a choice of paying the estate tax for 2010 or choosing to pay a different tax instead. Depending on an individual's situation, it may make financial sense to pay the estate tax.

These new rules bring up a number of issues and opportunities moving forward, so if you have questions about your estate plan and the new agreement, you should seek out the advice of an experienced estate planning lawyer who can explain your options.

Source: Forbes, You Still Need to Plan Your Estate, Stephen J. Dunn 12/21/10

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