Under current law, passed during George W. Bush’s presidency, the estate tax exemption steadily increased during the last few years, reaching $3,500,000 ($7,000,000 for a couple) in 2009 with a top rate of 45%. In 2010, the tax is actually repealed but for only one year. Under current law, the tax reappears in 2011 but at the 2001 exemption level of $1,000,000 ($2,000,000 for a couple) and a top rate of 55%. Allowing a one-year repeal of the estate tax could create havoc giving people an extra incentive to hand over property next year. If the estate tax is repealed for future years, the federal budget deficit would increase by over $500 billion dollars over a 10-year period.
A need to contain the budget deficit is likely to mean that a permanent repeal of the estate tax is unlikely. At the same time, the House Christmas recess and the Senate’s focus on passing healthcare reform legislation before it leaves for the recess, creates the potential for the estate tax being in limbo for a short period.
There is an increasing likelihood that the estate tax will expire at the end of the year because of congressional inaction—only to be reinstated retroactively at 2009 levels for an interim period early next year. If a comprehensive estate tax bill can not be passed in 2010, a provision for either a 1 or 2 year “patch” keeping the estate tax at 2009 levels is likely.
The House has passed H.R. 4154 the Permanent Estate Tax Relief for Families, Farmers and Small Businesses Act of 2009 which would continue the estate tax exemption and top tax rate at 2009 levels. The bill is now under consideration in the Senate, but a split among Democrats and a focus on health care is likely to have lawmakers hold off this year on debating the future of the estate tax.
A raft of tax provisions are set to end next year including the individual income tax cuts championed by President George W. Bush. The future of the estate tax could be considered along with the income tax since both taxes affect many in the business community.
The Obama administration has proposed making permanent the 2009 rate and indexing it to inflation in future years, while centrist Democrats have proposed reduced rates.
With the uncertainty, it is difficult to plan on possibilities, but there are some exclusions and deductions which are still available to help you.
During your lifetime, the gift tax exemption allows you to transfer up to $1 million of taxable gifts without paying gift tax.
You can exclude certain gifts up to $13,000 per recipient each year, $26,000 per recipient if your spouse elects to “gift-split”, without using up any of the gift tax exemption.
There is an unlimited marital deduction allowing your estate to deduct the value of all assets that pass from you to your spouse at your death, provided your spouse is a U.S. citizen.
Don’t take a wait-and-see attitude about reviewing your estate plan; review it now. Depending on how your plan is set up, it may require updates to avoid unexpected and undesirable results. Plus, with proper planning, you can make the most of increased exemptions.
