Current
Status of the Federal Estate Tax
In 2001 then President
Bush and Congress enacted significant changes to the federal
estate tax. The 2001 legislation provided for a gradual
increase in the amount of assets that could be transferred
and not subject to federal estate tax, as well as a decrease
in the rate of tax. Prior to the legislation, the first
$675,000 of assets transferred was exempt from federal
estate tax. The legislation increased the exemption amount
to $1,000,000 in 2002 with a maximum tax rate of 50%.
Over time the exemption amount increased and the tax rate
decreased so that in 2009 the exemption amount is $3,500,000
with the highest tax rate at 45%. Under the estate tax
changes, there is no federal estate tax in 2010, but sunset
provisions contained in the legislation will cause the
exemption amount to go back down to $1,000,000 in 2011
with a maximum tax rate of 55%.
Almost immediately after
the legislation was passed in 2001, the consensus was
that further revisions would be made by Congress and a
new President well before the one-year repeal of federal
estate tax took place in 2010. The general thought was
that the one year estate tax repeal of 2010 would never
happen and that Democrats and Republicans would settle
on an exemption amount of anywhere from $3,500,000 to
$7,500,000. This consensus continued through last year’s
election when then Senator Obama expressed his support
for a permanent exemption amount of $3,500,000, indexed
with inflation, and a 45% top tax rate.
Consensus has now been
replaced with confusion. Focus by the President and Congress
on health care, the economy and other issues has placed
the estate tax on the back burner, creating conflicting
thoughts on what will happen with the estate tax in 2010
and forward. John Buckley, Chief Tax Counsel for the House
Ways and Means Committee, stated off the record that he
believed Congress, with the President’s support, would
enact a one-year stop gap measure whereby the $3,500,000
exemption amount and 45% tax rate would remain in place
in 2010; thereby keeping the estate tax in place until
more permanent legislation could be enacted. His view
is shared by many others. Others close to the situation
however, have stated that they believe it is now too late
for Congress to do anything on estate tax this year, clearing
the way for the one-year repeal in 2010. The new consensus
is that permanent repeal of estate tax will not happen,
given the federal government’s need to raise revenue.
There is also some indication that the President now supports
a $2,000,000 exemption amount, rather than the $3,500,000
exemption amount.
So with federal estate
tax in flux, what should you do? We recommend that you
consider the following:
-
Stay apprised of any changes to the
law between now and year end.
-
Take an inventory of your net worth.
Be sure to include all assets including the value
of IRA’s and 401k’s, as well as life insurance death
benefits. The need to take action will largely depend
on your net worth in comparison to the exemption amount.
-
If the estate tax is repealed for
2010, inquire into revising your estate planning documents
in a manner that may allow permanent exemption of
those assets from federal estate tax.
Consider gifting strategies that allow you to take
advantage of current law and low asset values. These
opportunities may not be available in the future.
If you have any questions about
estate tax changes and the possible effect on your estate
plan, please call one of our estate planning attorneys.
Careful estate planning now can ensure that you preserve
as much wealth as possible for your family. We would be
pleased to assist you in separating the opportunities
from the pitfalls in planning your estate in light of
Congress’ frequent changes to the federal tax laws. If
you have questions, please call a member of our Estate
Planning Group: Alan Shovers, Brian Williams, John Hegeman,
Mark Samila or Allison Comstock @ (812) 423.3183.
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