When you hear some news that is better than it could have been your initial feeling about it often changes over time. For example, if you twisted your ankle badly while you were out jogging and went in for an x-ray you would be hoping that it wasn’t broken. If the x-rays do in fact come back negative you may breathe a sigh of relief, but you will still be hobbling home on crutches with a very painful and swollen ankle and you may wind up nursing the injury for quite some time.

This analogy is somewhat applicable to the changes in the estate tax parameters that came out of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. To jog your memory if need be, the estate tax was repealed for 2010, but the tax was scheduled to return in 2011 with a maximum rate of 55% and a $1 million exclusion. This was a giant a step backward compared to 2009, when the exclusion was $3.5 million and the top rate was 45%.

The new measure that was signed into law by President Obama on December 17th reduced the maximum estate tax rate to 35% and raised the exclusion to $5 million. Like the person who hears that his or her ankle is sprained but not broken, the estate planning community was pleased to hear this “good news.” But it is wise to keep the matter in the proper perspective, especially in light of the fact that the new parameters will expire at the end of the 2012 calendar year.

It is great to get even a bit of tax relief so these changes are welcome. But it is important to recognize the fact that a 35% federal levy on money that you have left over after you have paid hundreds of thousands or even millions of dollars in taxes throughout your life is not something to embrace for the long term.

Tags: Elder Law, Estate Planning, estate tax