Finally Congress did something. It extended the Bush era tax cuts for another 2 years. This included raising the estate tax exemption to $5 million per person, or $10 million for a married couple. Other good news: along with the increased estate tax exemption, the tax rate is lowered to 35% and the exemptions are made “portable,” meaning that husband and wife share them even if one does not have enough assets to fully use the exemption. Even more good news: the federal gift tax exemption is raised from a $1 million lifetime exemption to a $5 million lifetime exemption and a 35% rate.
Remember however, that if you live in some states, including Tennessee, you still have a state inheritance tax. Tennessee’s inheritance tax is applied to everything over $1 million owned at death. Furthermore, Tennessee has a gift tax with its own unique set of rules which do not follow the federal rules. Planning will still be required to minimize the Tennessee inheritance tax and to avoid running afoul of TN’s gift tax rules.
For most of us the new law means that we will easily avoid the federal estate tax, but planning will still be necessary to minimize or completely avoid state inheritance taxes. Those with very large estates may want to consider giving more than the $13,000 per person per year in annual gifts, now that $5,000,000 of gifts are exempt from federal gift tax. Only the TN gift tax would be required for TN residents. However, it is always wise to make sure that you have enough for your own needs, particularly your long term care needs, before embarking on a extensive gift-giving program.
And remember: the new law is effective only for the next 2 years. In 2012, we may return to the uncertainty that has become so familiar in the last few years.