The recent upheaval regarding the estate tax, including the repeal of the tax in 2010 and its return this year with yet an entirely new set of rules, have many people confused about how to prepare their plans for the future.

First, 2010 was indeed a very odd year for estate taxes. The much-celebrated repeal almost ended up being potentially more expensive for many middle class families. The possibility of a retroactive tax in 2010 kept many estates on hold, and the inability of lawmakers to pass legislation until the 11th hour left many taxpayers full of doubt and uncertainty.

Even now, the new rules are scheduled to sunset in 2013 and many will have to go through this all over again.

So here is what you can learn from 2010 and how to move forward in 2011:

The new estate tax exemptions and rates are quite different. In 2009 the exemption was $3.5 million. Anything over that exemption was taxed at 45% and in 2010 the tax was repealed altogether.

In 2010 many with an estate plan that had a “formula clause” for a Bypass Trust to reduce estate taxes had to update their plan quickly or they were in danger of leaving everything to the trust, while a spouse was left out in the cold.

The new 2011-12 rules increase the estate tax exemption to $5 million per individual ($10 million per married couple), with amounts over the exemption taxed at a 35% rate. In addition, for the first time, if the full estate tax exemption of the first of a married couple to die is not used, the unused exemption transfers over to the surviving spouse. If you aren’t sure your plan takes the new rules into consideration you’ll want to do some thorough analysis.

One of the most important aspects of the new rules is the tax election option for 2010 estates. No estate tax existed in 2010 but there was also only a limited “step up in basis”. This meant that many heirs selling inherited assets were taxed based on the original acquisition cost of the assets, not on their value as of the date of the taxpayer’s death, as is usually the case.

This led to a higher tax paid on the assets if and when they were sold, in spite of the lack of estate tax. The tax election option now gives 2010 estate holders the choice of using 2010 or 2011 tax rules. This provides more flexibility and should provide a happier choice for heirs.

Another big change in 2011 is the unification of estate, gift and generation skipping taxes. It is now much easier to tax plan and give gifts to children and grandchildren. In previous years these three levies have had varying exemption levels, making gift giving and succession planning a challenging exercise at best. For example, in 2009 the estate tax and generation skipping transfer tax exemptions were each $3.5 million while the gift tax exemption was limited to $1 million. Now, all three exemptions are $5 million.

So how long will the new rules last? Unfortunately these rules are only effective through 2012, at which point the provisions will end. Taxpayers may have to revisit the issue in 2012-13. Rather than being caught off-guard it is wise to plan ahead with your advisors to ensure you are prepared. The keys are to build flexibility into your plan and schedule reviews at regular intervals.

Author Bio: Steven B. Spewak is an attorney with Estate Plan Strategies, LLC in St. Louis, MO. He assists clients with Estate Planning, Wills, Trusts, Tax Planning, Asset Protection, Special Needs Planning, Elder Law and Charitable Giving. He can be reached at http://estateplanmo.com or 314-542-2210.

Category: Finances
Keywords: Steven Spewak, Estate Plan Strategies, St. Louis Tax Attorneys, St. Louis Estate Planning