I am getting a lot of questions from clients and friends about what the status is of the estate tax. Additionally, a lot of people coming to my blog from Google are searching for answers also.
First, some review.
There are two important components to remember when discussing the estate tax — the exemption, which is the amount of property that an individual may transfer at death before the tax kicks in, and the rate, which is when an individual has a gross estate that is larger than the exemption, the amount (percentage) that the property over the exemption is taxed at.
In 2001, the Republicans tried to repeal the estate tax (which at the time had an exemption of $675,000 and a rate of 55%), but because of budget and reconciliation rules they couldn’t really do it. So they did it over 10 years. The exemption gradually went up and the rate gradually went down.
In 2009, the exemption is now up to $3.5 million — meaning that anyone that wishes to pass on less than three and a half million is not subject to the estate tax (and a married couple that engages in proper estate planning can have an exemption of $7 mil), and the rate is 45%.
In 2010 as the law now stands, there is no estate tax at all. That means that you can transfer an unlimited amount at your death, and not have it subject to the estate tax. The gift tax exemption is still $1,000,000, so you can’t give it all away while you’re alive.
In 2011, as the law now stands, the estate tax kicks back in and the exemption goes down to $1,000,000 and the rate goes up to 55%. Before the housing crash, a $1,000,000 exemption really wasn’t that high.
So estate planners are calling next year “Throw Momma from the Train” year, because of the enormous possibility of having one year without any estate tax.
It’s important to realize that the gross estate, includes all of your assets, including not just cash in the bank, but your home, your stocks and bonds, your 401(k), any life insurance you own on your life, and even certain property that you thought you gave away.
If there is going to be an estate tax, 99% of Americans only care about the exemption. Make the exemption high enough, and it won’t apply to them. On the other hand, that 1%, the super rich, don’t care at all about the exemption. Does it matter for Michael Jackson’s estate whether the exemption is $1 million, or $3.5 million or $10 million? His estate will still be subject to tax at 45% on a significant amount of money.
So if you accept the fact that there is going to be an estate tax, there are different lobbies involved now. There is the lobby of the super-rich who wants to lower the rate down as much as possible (I’ve heard 15%), and then there is the lobby for less wealthy interests who are in favor of raising the exemption up as high as possible, say $15 or $20 million and does not care so much about the rate.
So that’s where we are. January 1, 2010 is approaching fast, and there are a number of bills kicking around Congress right now. Ignoring the unrealistic “let’s just repeal the whole thing” bills, almost all of the bills do the same thing*.
Instead of fixing the long term problem, they all extend the 2009 numbers for one more year, so that Congress can deal with it sometime next year, which is an election year. We won’t have a situation where people will die with no estate tax at all, but the problem isn’t fixed either.
*The various bills have different tweaks involving things such as “portability” and banning valuation discounts for family limited partnerships, but that’s less important than the overall picture.