The Clock Is Ticking on Bush-Era Estate Tax Cuts

Under the current federal tax laws, every individual may transfer up to $5.12 million tax-free at death or as a gift during life, providing a major benefit for people who want to preserve assets for their loved ones through careful estate and gift planning.

In its present form, the federal estate tax code contains another powerful tool known as portability. Portability applies when one spouse in a married couple dies without using up his or her entire $5.12 million estate and gift tax exemption. Traditionally, any unused portion of an individual's exemption was forfeited, but the portability provision currently in effect allows the remaining portion of a deceased person's exemption to be passed to his or her surviving spouse. Thus, in effect, portability creates a $10.24 million joint exemption for married couples.

However, time may be running out for people hoping to take advantage of these tax benefits in their estate and gift planning. Unless Congress takes action, portability and the increased exemption limit are set to expire at the end of 2012. At that time, the estate tax is scheduled to revert to provisions that were in effect before the Bush-era tax cuts were first enacted in 2001.

Major Changes May Be in Store

If Congress does not vote to extend the estate tax cuts, the estate exemption will be reduced to $1 million per person and portability will be discontinued at the end of 2012. The maximum tax rate for estates exceeding $1 million will also increase from the current rate of 35 percent to 55 percent. For people with estates subject to this so-called death tax, these changes could have dramatic financial consequences.

Even if the current estate tax cuts are not completely repealed in the year ahead, it appears likely that they will at least undergo major revisions that could have a substantial impact on the tax liability of larger estates.

As part of his 2013 budget proposal, President Obama recently recommended changes to the estate tax that would restore the provisions in effect in 2009. This would reduce the estate tax exemption to $3.5 million and lower the gift tax exemption to just $1 million. This means that estates larger than $3.5 million would be taxed at a maximum of 45 percent. In addition, the proposed budget includes a provision that would make portability permanent.

Given the uncertain future of estate and gift taxation beyond 2012, people who wish to take advantage of the estate tax benefits currently available are advised to discuss their options with an experienced estate planning attorney as soon as possible.