Estate Tax Update

Here's the latest on the federal estate tax.

On July 14 the Senate voted down a proposal that would have permanently repealed the  federal estate tax. Two proposals still remain to be considered:

First, the Responsible Estate Tax Act. This would reinstate the estate tax and make it retroactive to January 1, 2010. The tax would start at a 45% with a $3.5M exemption.  However, the tax rate would increase with the size of the estate. Estates valued above $10 million and below $50 million would incur a 50% rate. For estates over $50 million, a 55% rate would apply. For estates valued above $500 million, there would be a 10% surtax.

Second, a proposal, introduced by Senators Lincoln and Kyl that would establish an estate tax rate of 35% with a $5 million exemption phased in over 10 years and indexed for inflation.  This proposal would also provide for a step-up in basis of inherited assets, meaning heirs would be able to value the assets they inherit as their fair market value on the date of the decedent's death.

Of course, there is a third, default option: If Congress does nothing, the estate tax will return on Jan. 1, 2011, reverting to its pre-2001 levels, namely,  a $1 million exemption and a 45% top tax rate. Despite all the activity on The Hill, I suspect this approach has a lot of appeal for our elected officials. By sitting back and simply allowing the estate tax to return, they can raise desperately needed revenues and yet insulate themselves from accusations that they affirmatively raised taxes. If Congress goes this route, it will have significant impact on many middle class families, who will need to revisit their estate and tax planning to ensure they can take full advantages of all allowable exemptions.

To be continued...