Estate Tax is Dead (For Now): What to Do?

February 4, 2010

Congress let the federal estate tax die for 2010. Lots of people are confused about what it all means. It's no wonder ... the current situation is a huge mess that creates uncertainty for those with large estates.

Repeal for 2010 but the Story Is Not Over

Ever since the Economic Growth and Tax Relief Reconciliation Act of 2001 became law, the estate tax has been a two-part story:

    * The federal estate tax was scheduled to be repealed this year (This happened after the top estate tax rate gradually went down and the exemption amount on estates that didn't have to pay the tax went up).
    * The estate tax is scheduled to come roaring back in 2011 and beyond. In those years, estates worth as little as $1 million are scheduled for a tax whipping (versus estates worth more than $3.5 million in 2009), and the maximum federal estate tax rate is set to rise to 55 percent (versus 45 percent last year). 

Most people assumed Congress would step in and continue the relatively generous (by historical standards) $3.5 million federal estate tax exemption with a maximum estate tax rate of 45 percent (the same as last year). More optimistic observers were hopeful the exemption would be bumped up to $5 million or so with a maximum rate well below 45 percent.   

But Congress did nothing about the estate tax last year and it could be weeks, or even months, before lawmakers get around to tackling it this year. By then, the issue may be so contentious that all previous predictions about what might happen could get tossed out the window.

So to sum up so far, we are in a bizarre place where there is technically no federal estate tax on those who happen to pass away right now but there is a harsh federal estate tax looming over those who happen to pass away in 2011 and later years.

Many tax professionals still believe Congress will resurrect the federal estate tax sometime in 2010 and that the effective date of the new rules (whatever they turn out to be) will be sometime in 2010. Some experts believe that making the new rules retroactive to January 1, 2010 would be unconstitutional. 

The repeal of the estate tax leaves us in uncharted waters. For the past 93 years, the United States has relied on the estate tax as a source of funding (before that, there were various other taxes imposed on estates during times of national emergencies). So almost no one thinks that a permanent repeal will be enacted, especially during these tough economic times. One thing is certain, estate planning will be challenging for the next several years. Documents may have to be changed now and revised again before too long.

At PerelsonWeiner we are carefully assessing the situation and are ready to consult on strategies that are appropriate for your individual estate planning wishes and needs. Please contact us if you have any questions or would like more information.

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