Three Tax Law Changes a Person Needs to Know for Estate Planning in 2012


On Dec. 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (TRA 2010). The law contained changes to the federal estate taxes, gift taxes and generation-skipping transfer taxes for 2010, 2011 and 2012. People need to be aware of these changes so they can take advantage of the benefits these new rules may offer by updating their estate plans.

Estate Tax

TRA 2010 changed the federal estate tax so that the first $5 million of an estate is tax-free (provided no taxable lifetime gifts had been made by the decedent) and the tax rate on anything above that amount is 35 percent. Formerly, only $1 million of an estate was tax-exempt and the tax rate ranged as high as 55 percent. Additionally, the law made it so that the estate tax and generation-skipping transfer tax as well as the gift tax exemptions are all indexed to inflation starting in 2012. As of Jan. 1, 2012, the exemptions are all $5.12 million.

Furthermore, married couples now may share any unused portion of the $5 million exemption (the so-called “portability” rule). For example, if one spouse dies and only has an estate worth $3 million, the other spouse can use the leftover $2 million in addition to his or her own $5 million exemption.

Generation-Skipping Transfer Tax

The generation-skipping transfer tax applies to assets that pass two generations or more. For example, if a grandparent leaves property to a grandchild as part of an estate plan, it is subject to this tax. Similar to the estate tax, the generation-skipping transfer tax exemption increased to $5.12 million, and any amount above that is also taxed at a 35 percent rate.

Gift Tax

TRA 2010 increased the amount that a person can give as a tax-free gift for 2011 to $5 Million, once again unifying the gift tax with the estate tax. Previously, the gift tax exemption had been locked in at $1 million. The new law also reduced the gift tax rate to 35%. As in the case of the estate and generation-skipping taxes, the gift tax exemption has been increased to $5.12 million for 2012 to account for inflation.

Consult an Attorney

Tax laws change frequently, and the changes can have a big and often adverse impact on a person’s estate plan. The new $5.12 million gift, estate and generation-skipping tax exemptions are scheduled to be reduced to $1 million effective January 1, 2013 (with inflation adjustment only for the generation-skipping tax). Thus, 2012 is the last opportunity for making large gifts unless and until the law changes again.

If you have not updated your estate plan recently, consult soon with an experienced estate planning lawyer who can review your circumstances and help you take advantage of current laws, maximizing the tax benefits that are now available.