Estate Tax in Limbo

Currently, the estates of individuals dying in 2009 are subject to estate tax on the value of their estate that exceeds $3.5 million with rates as high as 45%. However, in 2010, based on a law change made over eight years ago, the estate tax is being repealed so that there will be no tax on any portion of the estates of individuals dying in 2010. Congress has been ignoring this issue for some time and if lawmakers continue to do nothing, the estate tax will disappear next year before re-emerging in 2011 at the older, higher rate of 55% (and lower exemption of $1 million). This is exceedingly unlikely for a variety of reasons, not the least of which is the mischief that could come from exploiting the generous gift tax exemption scheduled to come into effect in 2010.

There have been a number of proposals put forth including making the 2009 estate tax exemption permanent and indexing it for inflation in the future.  Another proposal would cap the estate tax rate at 35% with a $5 million exemption.  Watch for legislation late in the year or in 2010.

In the meantime, individuals should continue to write wills and develop estate plans to ensure that their assets will pass as they desire and that special needs of particular heirs will be properly addressed. This is so even if there is a good chance of survival until a year when estate tax won't be owed because of the exemption or repeal. Individuals who may have an estate larger than the $3.5 million exemption amount that applies in 2009—or the $1 million amount that is currently scheduled to apply for 2011 (when the estate tax is set to be restored one year after it is repealed)—might consider making annual exclusion gifts each year. The gift tax annual exclusion (periodically adjusted for inflation) allows you to give $13,000 to an unlimited number of donees each year without paying gift tax. By doing this, you remove the gift amounts from your estate and save estate tax. In addition, you remove the post-transfer growth in the gifts from your estate.

Please give this office a call if you need information on how these rules may affect your (and your spouse’s, if applicable) estate planning.

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