Prior to recent changes in the tax law, individuals were faced with an interesting predicament related to their estate planning. Beginning about ten years ago, the amount of an estate that was included in the exemption for tax purposes steadily increased. This meant less of the estate was subject to the tax and that therefore, more of the estate would be passed on. In 2002 the exemption was $1 million, it rose to $3.5 million in 2009, and for 2010 there was no estate tax. But beginning in 2011 the estate tax would be reinstated at $1 million or $2 million for couples, with a top tax rate of 55 percent.

A deal in December set the exemption level at $5 million, or $10 million for married couples, with anything over those exemption amounts being taxed at a rate of 35 percent. The new rules also change the gift tax exemption, which had not been increased over the past ten years as the estate tax exemption had.

During the years when the estate tax exemption continued to rise, the lifetime gift tax exemption remained at $1 million. After the deal in December the gift tax exemption now matches the estate tax exemption at $5 million, or $10 million for married couples. This may change the calculations you make going forward about the best way to plan for passing along your assets.

The New York Times recently published an article that considers some of the potential effects of this change. For example, it points out that individuals who had already exhausted the amount allowed under the gift tax exemption may now find that they can gift additional assets before they hit the maximum under the exemption.

Source: The New York Times "Estate and Gift Rules: Some Clarity, for Now" Carla Fried, February 12, 2011