Since the recent election, there is speculation that the Republicans may try to address the estate tax issue with the lame duck Congress. It was a Republican controlled Congress that enacted the law in 2001. The law called for an increase in the estate tax exemption until 2010 when the tax would disappear altogether, only to reappear in 2011 at the lower exemption level of $1 million at a tax rate of .
There are two aspects to the estate tax law. One is the amount of an estate that will be subject to estate tax. The second is the rate at which an estate is taxed. Back in 2001, if a single person had an estate in excess of $675,000, estate tax would be due. For a married couple, the exemption was twice that, or $1,350,000. The tax rate was 55%. The exemption gradually increased over the years so that in 2009, the exemption for a couple was $7 million for a married couple at a tax rate of 45%. This year we have had no tax at all, a year in which several billionaires died, leaving their estates tax free.
Congress has a number of options:
1. Do nothing. If Congress fails to address the issue, on January 1, 2011 the exemption amount will go to $1 million for single people and $ 2 million for married couples. This change will not only affect the rich, but also affect the middle class, as many Americans today are in the category of having a gross estate of $1 million.
2. Reinstate the rates and exemption amount from 2009 and make it permanent. It has been estimated that when the $7 million exemption was in place, only 3 estates out of 1,000 had to pay any tax. This approach would result in some revenue, but not the huge revenue that would result from option 1.
3. Come up with an exemption amount and rate for 2011 and index it for inflation. This approach is similar to option 2 but would increase the exemption amount from year to year.
4. Do away with the federal estate tax. The Congressional Joint Committee on Taxation estimates that eliminating the estate tax would cost about $500 billion over the next decade.
We are already in mid-November, so we should know if Congress will address this issue soon. Look for future articles as to how their action or inaction will affect your estate planning.