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by Dennis L. Voelkel, Esq.

It’s official!  President Obama signed into law the Tax Relief Act of 2010 making major gift, estate and generation skipping tax changes.  Under the new law, the estate tax exemption is increased to $5 million per taxpayer and the maximum tax rate is lowered to 35%.  In addition, the unused exemption of a deceased spouse may be transferred to the surviving spouse, who together would have a combined estate tax exemption of $10 million per couple.  This article highlights the implications of these tax law changes on estate planning.

What does this Mean for You?

With proper planning, the increased exemption means that far fewer families will owe federal estate tax when their loved ones pass away.  It also means that many of the estate tax planning structures currently found in estate plans have become obsolete, and in some cases, unnecessary.

For instance, in the case of married couples, will and trust provisions that provide for the assets of the first spouse to pass to a “credit shelter trust” (this trust sometimes goes by other names) may be unnecessary for estate tax purposes.  Instead, the assets could simply be passed to the surviving spouse.  However, there are still important non-tax reasons why passing the assets to a credit shelter trust remains a wise choice.  Primarily, the credit shelter trust will continue to perform the valuable function of protecting assets from potential loss if the surviving spouse remarries or engages in professional, business or investment activities exposing him or her to risk of loss; thereby fulfilling the legacy wishes of the spouse establishing the trust.

Of course, the transfer of the unused exemption amount of the first spouse to the surviving spouse reduces the importance of dividing assets between spouses.  This is particularly helpful in situations where dividing assets between spouses is difficult because a large portion of the assets consist of retirement plans or closely held business interests subject to transfer restrictions.  There remain many cases, however, where dividing assets during life is a very good idea.

Changes Remain Temporary

The new estate tax laws accompanied the extension of the Bush-era tax cuts originally passed in 2001.  As a result, this new estate tax structure is not permanent and will expire in 2013.  In view of the history of the estate tax, the significant but failed attempts to eliminate the estate tax over the last decade, and the federal government’s need for additional revenue, it is likely that this new structure will become permanent in 2013.  Since the modern estate tax was enacted in 1916, the exemption amount has decreased only once – during the Great Depression.  In addition, the proponents of the estate tax recognize that a higher exemption makes the estate tax less of a political issue.  It is possible, however, that in view of the need for additional revenue sources, the tax rate could be increased above the current 35% level.


The new estate tax law creates opportunities for many clients to better plan their estates to address non-estate tax goals.  These goals often include determining when and how to pass on their assets in order to provide the beneficiaries with the greatest benefit.  This may involve implementing trust arrangements to protect the assets from loss due to divorce, risky spending or investment choices, or claims arising from business activities.  Also, the temporary nature of the law should be considered.  Estate planning should never be undertaken from a “one size fits all” approach.  While clients often have similar goals, their circumstances and beneficiaries are unique, requiring each client’s estate plan to be individually designed.

Practical Advice, Personal Attention

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