Our government is spreading the love this season in the form of a long awaited new tax law which extends the current favorable income tax provisions.  The tax law also provides new economic stimulus in the form of payroll tax reductions for 2011 and an extension of unemployment benefits.  And just when you thought it couldn’t get any better?  How about a $5,000,000 estate tax exemption!

 Many of you know that the previous law was set to re-introduce the estate tax in 2011 with a $1,000,000 exemption.  Most tax professionals assumed that the law would  be amended either this year or early next year to continue the $3,500,000 exemption which was available in 2009.  But this $5,000,000 exemption caught us all off guard.  In fact there are numerous other provisions in the tax law that we have not yet had a chance to digest, but I wanted to pass along a few quick details that have not made it into the mainstream press coverage.

 The tax law does have provisions which would apply retroactively for 2010 for decedents who have already died, but these provisions are optional.  Estates for 2010 can elect to keep the old rules or take the new rules if they work out better.  Don’t worry, the law provides for extensions on estate tax related deadlines to allow everyone time to figure out the right course of action.

 The $5,000,000 exemption is now “portable” between husband and wife.   They each have an exemption and if they don’t use all of the exemption at death then the unused portion can be transferred to the surviving spouse.  This will simplify tax planning considerably and allow for shorter and less complicated documents going forward.

 The $5,000,000 exemption is not only for transfers at death but also for gift transfers.  This is an important change that will open up new planning opportunities for some high net worth clients.  The previous law only afforded a $1,000,000 exemption for gifts.  However before making decisions concerning large gifts, clients must also consider the impact of tax basis.  In some cases a large gift can be a bad tax decision; see my blog entry from April 20, 2010.

 This new tax law is in place for only 2 years, with the expectation that it will be extended or further modified in the interim.  It is not clear yet how the estate tax provisions in the law will fare, but it appears that we could be faced with this same estate tax showdown   (a return to a $1,000,000 exemption) in 2 years….right in the middle of another election.

 That is the early report.  I’m off to spend time with family and I hope you are as well.  This year we’ll gather around the fire and reminisce and teach the children about the good old days……when deficits were small and we even had a balanced budget in some years…and of course we never had such things as 0% credit cards…..back then we had to save money if we wanted to buy something….and I remember when……

 Merry Christmas and Happy New Year to you all! 

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