Throughout 2012 people within the estate planning community were faced with a grey area concerning the federal estate tax. It’s challenging to plan ahead effectively when crucial information is unavailable.

To explain, at the end of 2010 a legislative measure that has come to be known as the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was passed. Provisions contained within this act set the estate tax exclusion at $5 million in 2011 with an inflation adjustment possible in 2012. The top rate of the tax was to be 35% in 2011 and 2012.

These parameters were only in place for those two years. If nothing changed along the way, the estate tax exclusion was going down to $1 million and the maximum rate was going up to 55% in 2013.

This is where things stood during the 11th hour at the end of 2012. However, legislators finally reached a compromise that enabled us to avoid the so-called fiscal cliff. The terms of this deal have become the American Taxpayer Relief Act of 2012.  Congress called the exemptions “permanent.”

This act allows the estate tax exclusion to remain at that $5 million base with adjustments for inflation. After being adjusted, the 2013 exclusion was set at $5.25 million. The maximum rate was raised from 35% to 40%.

It should be noted that the above parameters also apply to the gift tax and the generation-skipping transfer tax.

Before you get too comfortable with these “permanent” exemptions,  there could be changes looming over the horizon. The White House has already released its budget proposal for 2014, and lowering the estate tax exemption is one of its proposals!

The proposal includes a $3.5 million exclusion and a 45% top rate. These changes would go into effect in 2018.