Updates in Federal Estate Tax Law

The federal estate tax has long been a moving target. Most recently, in 2007 and 2008, the exemption level amount was at $2 million and the top tax rate was at 45%. In 2009, the exemption amount was $3.5 million with the top tax rate again at 45%. In 2010, there was no federal estate tax. As a result, several billionaires, including George Steinbrenner who owned and managed the New York Yankees, died in 2010 owing no federal estate tax.

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

In brief, the 2010 tax law sets the federal estate tax exemption at $5 million, and imposes a 35 percent tax rate on amounts exceeding this exemption. It is set to expire two years from now.

Details of the 2010 Act:

• It impacts the gift tax exemption, so that it’s now “reunified” with the estate tax exemptionas existed prior to 2001. Although this gets complicated, it means in essence, that for the next two years you can gift up to $5 million without paying any gift tax, although it will count toward your estate exemption amount.
• Estate tax exemptions will now be “portable” between husband and wife. This means that if the estate of the first spouse to die is, for any reason, unable to use the entire amount of the deceased spouse’s remaining estate tax exemption, the executor of the deceased spouse’s estate may elect to transfer any “unused” estate tax exemption to the surviving spouse. The surviving spouse, in turn, may use this transferred exemption in connection with his or her own lifetime gifts and/or to offset estate taxes imposed at the surviving spouse’s death. This benefit will be effective only if the surviving spouse makes taxable gifts or dies in 2011 or 2012.
• According to congressional estimates, the revised estate tax will add $68 billion to the federal deficit over the next decade.

Due to these revisions, the current federal estate tax doesn’t impact many people. According to the non-partisan Tax Policy Center, less than 8% of estates paid federal estate tax in 1976. By 2011, only 2.3% paid the tax. And, in 2009 when the more restrictive $3.5 million exemption was in effect, only 100 family farms and small businesses paid the tax. Alan Rothschild, Chair of the ABA’s Real Property, Trust and Estate Section, estimates that less than one half of 1% of people who die in 2011 will pay estate tax. The Tax Policy Center estimates that, under the new tax law, in 2011 there will be 3,600 taxable estates. 440 farms and businesses will be impacted, of which 50 could be classified as “small farms and small businesses”.

Please keep in mind that, even if your estate may not be taxed pursuant to federal law – it nonetheless may be taxed by the state of Washington. Please see the link on the estate planning sidebar, which provides more information regarding the estate tax structure in Washington.