The Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Act), enacted into law on Dec. 17, 2010, has created a multitude of interesting possibilities for estate planning attorneys. But it also gives rise to negotiating opportunities and drafting pitfalls for attorneys preparing premarital and property-settlement agreements.

Under the 2010 Tax Act, in the years 2011 and 2012, the amount one person can transfer by gift or at death without incurring a federal estate tax, known as the exemption or exclusion amount, is $5 million. Thereafter, absent further action by Congress, the exemption will be reduced to $1 million. Also included in the 2010 Tax Act, and new to the area of federal estate and gift tax law, is a provision allowing portability of the exemption. This allows one spouse to utilize the deceased spousal unused exclusion amount (DSUEA), therefore making it possible for a married couple to transfer $10 million free of federal estate tax, without using bypass or credit-shelter trusts or disclaimers, and regardless of the titling of assets. Like the $5 million exemption, portability is also set to expire on Dec. 31, 2012. The maximum federal-estate and gift-tax rate during this time frame is set at 35 percent (increasing to 55 percent in 2013). So, for example, if a client’s worth is $7 million, the ability to use a spouse’s exclusion may save as much as $700,000.

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