Federal Estate Tax Update

As many people know, Congress allowed the Federal Estate Tax (also known as the Death Tax) to lapse on January 1, 2010. We are currently operating without an estate tax. I can distinctly remember telling clients that Congress would never let the tax lapse, but that goes to show what I know about the reasonableness of our elected officials.

This situation has created a tremendous amount of uncertainty for estate planners, especially given that most expect the estate tax to return at pre-repeal limits and rates. The general consensus appears to be a wait and see approach. If a client has a documents that makes dispositive distributions based on the amount of the federal estate tax exemption, then they may want to analyze the effect repeal may have on their documents. For example, a document may say "I give the maximum amount that can pass free from federal estate taxes to __________." If this person were to die today, this amount is arguably the entire estate.

There is currently legislation that would "fix" this problem. The bill (2009 HR 4154) has been passed by the House and is currently in the Senate. This bill would establish the estate tax exemption at the 2009 level of $3.5 million with a maximum tax rate of 45%. You can review a copy of the actual bill here.

Hang in There

As we approach the end of the year, it is worth noting that January 1, 2009 is a significant date for federal estate tax purposes. The "tax-free" amount, which is the amount an indvidual can pass estate tax free to his or her family, jumps from $2,000,000 to $3,500,000. The financial results for a family can be significant, as any assets over the tax-free amount are taxed at a roughly 45% rate. There may be some families that try to delay the enforcement of a living will until 2009. It is a shame that families may have to think about taxes in making those decisions, but unfortunately it is a result of the current tax law structure.

For the rest of us, such a significant tax law change may warrant a review of our current estate plan.