The Tax Relief Act of 2010, passed by Congress in the waning days of the December, 2010, increased the federal estate tax exemption to $5,000,000. However, an equally significant aspect of the new law is the unification of the federal gift and estate tax exemptions. Both exemptions will now be $5,000,000 in 2011, with an adjustment for inflation in 2012. Thus, clients who utilized their $1,000,000 gift tax exemption in prior years will now be able to make up to $4,000,000 of additional tax-free gifts during 2011 and 2012. It should be noted that the gift tax exemption utilized during a client’s life will reduce the available estate tax exemption available upon death.

The tax rate on amounts which exceed the estate and gift tax exemptions is set to be 35% for 2011 and 2012, the lowest ever.

Then, unless there is additional legislation, in 2013 we will revert back to exemptions of $1,000,000, and a top tax rate of 55%.

New York, New Jersey and Connecticut have kept their estate tax exemptions at various levels; New York is $1,000,000, New Jersey is $675,000, and Connecticut is $3,500,000. This could result in significant state estate tax, even where the value of an estate is less than the federal cap, resulting in no federal estate tax.