Repeal of Estate Tax Likely to be Short-Lived

Published: 2010-1-8

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As December 31 came and went, so did the federal estate tax – or at least for the time being. The estate tax, or the “death tax” as it is more affectionately known, is a tax imposed on the property and assets (i.e. “the estate”) that an individual leaves behind at death. Under 2009 rates, the first $3.5 million of the estate was exempt from the tax while any amount over this was taxed at 45 percent.

Despite last minute efforts by key members of the House of Representatives, a bill that would have reinstated the federal estate tax permanently at 2009 rates did not pass the Senate. In fact, HR 4154 never made it past the first reading in the Senate, where the focus for the last month has been on passing the health care reform bill. As a result, the estate tax was repealed effective January 1, 2010.

However, if action is not taken to make the repeal permanent or to set a new estate tax rate and exemption level by December 31, 2010, the estate tax will return to pre-2001 levels in 2011, which would mean a $1 million exemption and 55 percent estate tax.

The current repeal of the estate tax stems from legislation passed during former President George W. Bush’s first term in office. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), over the past 10 years the federal estate tax has been scaled down. Many commentators believed Congress would take action well in advance of the December 31 deadline to save the tax, but the legislation kept getting pushed behind higher priority bills.

Congress Promises Action

Even though the estate tax is supposed to be gone for the entire year, certain members of the House are promising to take action early this year to bring the tax back and not just for 2011. Some Congressional members have stated that they will make any estate tax legislation retroactive to January 1, 2010, meaning that the yet-to-be-determined tax rate and exemption level will apply to all estates that passed tax-free from the beginning of the year.

The estate tax has long been reviewed as controversial – both by those wishing to save it and those who want to make it go away. Republicans have been traditionally opposed to the tax. They argue the estate tax is a double-tax, since the assets are taxed once during the individual’s lifetime and then again at death.

Democrats, on the other hand, point out that the tax only affects the wealthiest of Americans, with less than one percent of estates paying the tax in 2009. They also argue that the tax is vital to the federal government, which netted $25 billion last year from estate taxes alone.

The issue, however, is not divided cleanly down party lines. Some key Democrats in the Senate have joined Republicans in opposition to the tax. While these members do not support a permanent repeal of the estate tax, they are in favor of decreasing the federal tax rate to 35 percent and increasing the exemption level to $5 million.

Some speculate that this division between House and Senate Democrats may make it difficult to pass temporary legislation to bring the tax back in 2010. Others, however, believe that Congress will be successful in passing some temporary legislation to reinstate the tax for 2010.

Contact an Experienced Attorney Today

It is important that those who are impacted by the repeal have their estate planning documents reviewed sooner rather than later by an attorney. The repeal may make it necessary to amend your plan and change how your assets are left to your loved ones. An experienced estate planning attorney also can help you adapt your plan once it becomes known what Congress intends to do with the estate tax.

If you have questions about the repeal of the estate tax or other questions concerning estate planning, contact an experienced estate planning attorney today. Whether you need to update your estate plan because of the repeal or simply have questions about how the repeal impacts you, a lawyer experienced in estate planning can help.