The Federal Estate Tax: Past, Present & Future

Tuesday, August 31, 2010

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2010 is a special year for estate planning attorneys and those interested in creating trusts and wills, because Congress must decide whether to keep the repeal of the estate tax (also affectionately called the death tax) created in 2001. Read on.

The following information is from http://www.ca-trusts.com/repeal.html

The federal estate tax has been repealed as part of a 10-year bill that steadily increased the exclusion from the tax, and then repealed the tax in its tenth year. Whether it will stay repealed is up to the U.S. Senate, which is expected to consider a House bill that was passed last year. That bill will permanently extend the $3.5 million exclusion.

The bill, H.R. 4154, will exempt estates of less than $3.5 million from the estate tax on a permanent basis. It is the same exemption that we have had for 2009, and about 99.5 percent of the estates in the U.S. are no longer subject to the tax under the $3.5 million exemption. For larger estates, an A-B trust can double the exemption to $7 million.

Other Provisions of the House Bill: The current tax rate of 45 percent will remain in place, instead of increasing to 55 percent in 2011. This tax rate applies only to estates greater than $3.5 million for unmarried decedents, and estates greater than $7 million for married decedents who have tax planning.

The new carryover basis rules that are planned to go into effect on Jan. 1, 2010, will be repealed. Also known as a step-up basis, these rules have been in effect for many years and have saved taxpayers a fortune in capital gains taxes. The law that was passed in 2001 put substantial limits on the amount of step-up that could be used after 2010. The law was also unclear about how the reduction in the step-up was to be applied in larger estates.

The following is an explanation of former estate tax law:

Under current estate tax law, the exemption amounts will be increased until 2010 as shown in the table below:

Year of Death
Exemption Amount

2002 $1,000,000
2003 $1,000,000
2004 $1,500,000
2005 $1,500,000
2006 $2,000,000
2007 $2,000,000
2008 $2,000,000
2009 $3,500,000
2010 Repealed
2011 $1,000,000

Before the 2001 tax bill was enacted, estate tax rates ranged from 37 percent to 55 percent, and some estates paid a higher percentage. The current tax rate is 45 percent, which is still among the highest tax rates in this country. (For comparison purposes, the highest income tax rate for individuals is 35 percent.) The rates included in the 2001 bill are as follows:

Year of Death
Maximum Tax Rate

2002 50 %
2003 49 %
2004 48 %
2005 47 %
2006 46 %
2007 45 %
2008 45 %
2009 45 %
2010 0 %
2011 55 %

The gift tax will not be repealed. Although the estate tax is being repealed, the gift tax will not be repealed. A new $1,000,000 lifetime exclusion from the gift tax will be allowed per person (starting in 2002), and the tax rate will be the same as the highest income tax rate in effect at the time the gift is made. In 2010, assuming that the estate tax is repealed at that time, the gift tax will be 35 percent. Why wasn’t the gift tax repealed along with the estate tax? Congress is well aware that estate planners would welcome an opportunity to shift assets from older to younger generations if there was no gift tax.

Depending on the size of the estate, not all appreciated assets will get a new basis at death, starting when the estate tax is repealed in 2010. Currently, assets owned by a decedent are appraised at death, and the basis changed to the new appraised value. For example, if someone bought a house for $50,000 many years ago (and has not made any improvements to it, or depreciated it), the basis for capital gains purposes is $50,000. But if the owner dies, the basis is stepped up to the fair market value of the property as of the date of death. If the appraisal shows that the fair market value is $2,000,000, for example, that becomes the new basis under current law. Under current law, the decedent’s children could inherit the property, sell it for $2,000,000, and pay no capital gains taxes.

As of 2010, that step-up in basis would be eliminated, except that $1,300,000 in transfers to beneficiaries (other than a spouse) would receive a step-up in basis, and $4,300,000 in transfers to the decedent’s spouse would receive a step-up in basis. Transfers in excess of these amounts would have a carry-over basis.

Courtesy of Law Office of Stephen C. Gruber (http://www.ca-trusts.com/

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