For most of 2010 we have been waiting for Congress to tell us what they were going to do with the estate tax—eliminate it completely, establish exemptions and rates similar to 2009 levels (estate tax exemption of $3.5 million and an estate and gift tax rate of 45%), or let the Bush tax cuts expire altogether, sending us back in time and pegging the estate and gift tax rates at 55% and the estate and gift tax exemptions at $1 million.

As we approached the new year, it looked more and more likely that we would go back in time. Congress was deadlocked.

And then came the art of compromise.

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance, Reauthorization and Job Creation Act of 2010 (the New Tax Act). Below is a table summarizing the new federal estate, gift and generation skipping tax rates and exemptions contained in the New Tax Act:

What Does This Mean for You?

• Have your estate plan reviewed now. Most estate plans create trusts by formula tied to the federal estate tax exemption. With a higher exemption of $5 million in 2011, too much of your estate may end up in a trust that does not meet your estate planning objectives. Also, because the difference between the Minnesota exemption and federal exemption is $4 million, your current estate plan may expose you to a significant Minnesota estate tax on the first death—possibly as high as $391,000.
• Consider making large gifts to children in 2011. The increase in the federal gift tax exemption to $5 million in 2011 is the most significant change and benefit in the New Tax Act.
• Consider making transfers to grandchildren in 2010, 2011 and 2012. The 0% rate on generation skipping transfers in 2010, and the increase in the federal generation skipping tax exemption to $5 million for 2010, 2011 and 2012, also provide significant opportunities to transfer wealth to grandchildren and more remote descendents. Some planning for grandchildren will only be available in 2010.