October 2009 Archives

October 19, 2009

FEDERAL ESTATE TAX EXEMPTION UPDATE

As 2010 looms near, our law office has received multiple inquiries about the status of the federal estate tax exemption for the upcoming years. Generally, federal estate taxation pertains to the amount of tax your estate will be liable for at your death.

Over the years, the federal estate tax exemption amount has been subject to a graduation system that provided for the federal exemption to increase while decreasing the estate tax rate.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, for this year (2009) each individual enjoys a 3.5 million dollar exemption as to federal estate tax. Assets over $3.5 will be taxed at 45% (compared to 55% in past years). Basically, this means that the first $3.5 million of your assets will escape estate taxation at the federal level.

Further, as the law currently stands now, in 2010, federal estate taxation will disappear only to find it reappearing in 2011 at a rate of 55% on estates with assets over $1 million.

It is thought that President Obama and Congress will act prior to 2010 to prevent the federal estate tax from being repealed and there are a several options for Congress currently being considered.

Here is a summary of some of those options:

ONE:
a) The exemption of $3.5 million from 2009 is made permanent as is the 45% tax rate.
b) The exemption is indexed for inflation
c) Gift and estate tax is unified
d) If a decedent doesn't use their exemption, the transfer of the unused part to the spouse will be allowed.

TWO:
a) An exemption of $2 million will be permanent
b) For estates between $2 and $5 million the tax rate will be 45% and for estates $5 to $1 million the tax rate will be 50% and the tax rate will be 55% on estates more than $10 million.
c) same as (c) above
d) same as (d) above

THREE:
a) An exemption of $5 million will be permanent
b) The tax rate will equal the top rate for capital gains

Of course this discussion is simplified in an attempt to illustrate the basics of federal estate taxation and the pending changes in the law. If you would like more information consider consulting "The Green Book", published by the Treasury Department providing general information about the pending proposals. If you have questions or are interested in estate planning, contact our office.