Among those lawyers who are active in trusts and estates and other wealth planning, 2012 has been described as the Year of Certainty, and future years as the opposite. For that reason, the last four months of 2012 should see an increase in planning activity, beyond the higher levels that have already occurred this year.

What Caused This Situation?

In the tax law that was enacted in 2001, at the beginning of the George W. Bush administration, the exemption from federal estate tax, which was then at a level of $675,000, was increased over a period of years to $3.5 million. As the law was written, the estate tax was to disappear for 2010. Then, in 2011, the tax was to return and the exemption was to fall back to $1 million. Meanwhile, the estate tax rate structure was gradually changed from a graduated structure of rates to a flat rate of 45 percent, with a return to the graduated rates in 2011. Few believed that the tax structure as enacted would remain in effect, but it did. Congress then renewed the federal estate tax law in 2010, as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. For those who died in 2010, their representatives could make a choice: either pay zero estate tax and get no step-up in basis on the assets in the estate (and therefore subject any increase in the value of the assets to capital gains tax) or be subject to estate tax at a flat rate of 35 percent with an exemption of $5 million and receive the step-up in the basis of assets (and pay no tax on the capital gains up to the date of death).

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