In 2009, the estate tax exemption was $3.5M.  If you had $3.5M or less at the time of your death, you wouldn’t have to pay any estate taxes, but if you had more, you would have to pay taxes on the amount over the exemption.  In 2010, the exemption is unlimited so therefore no estate taxes.

This all applies to the federal estate tax.  Massachusetts has its own estate tax that is not related to the federal tax.  So while in 2010, the federal exemption is unlimited, Massachusetts still has theirs set at $1M.  This means that if you have more than $1M at the time of death in 2010 and you also lived here in Massachusetts, then you will have to pay Massachusetts an estate tax (arguably a lot less than if you also had to pay the Federal government).

But this generous lapse in tax in 2010 does not come for free.  Estate taxes are gone but so are the inherited step-up in cost basis of inherited property.  In the past, if your mom left you a house valued at $2M at the time of her death, when you inherit that property, your cost basis for tax purposes would automatically go up to $2M.  That means if you turned around and sold the property that day, you would have to pay no estate tax or capital gains tax.  In 2010 however, the step-up in cost basis is limited to only the first $1.3M.

Keep in mind however that the gift tax is not repealed in 2010.  The generation-skipping tax is repealed.

With all these changes in the estate tax laws, if you’re doing any sort of wills and trust planning, you need to see an estate planning attorney to make sure everything is set up correctly.  A pre-packaged will and trust kit from a stationary store or a $20 computer program will not be sufficient to plan around all these changes and be property tailored to your individual circumstances.

For those that have estates larger than $1 Million dollars, you are going to be subject to the estate tax.  If you’re not that far over, there is a way to decrease your taxable estate and that is by gifting some of it away.  In this year, you are allowed to gift $13,000 per person gift and estate tax free.  If you’re married, you and your spouse can both gift $13,000 each, making each per person gift worth up to $26,000 per person, per year.

Take for example, if you and your spouse have 2 children and 4 grandchildren and your entire estate is $1,250,000 (that’s $1.25M).  You and your spouse can gift to each one of them $13,000 each, making that a total of  $156,000.  You can then gift to them again in January for the new year another $156,000.  In 2 months, you have effectively rid your estate of $312,000!  That brings your estate below $1M and neither you or your spouse is in any danger of incurring estate taxes.

As they say, give a gift that matters this year.