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For years, my clients and colleagues have repeatedly asked me,
“When is Congress going to wipe out the estate
tax?” Routinely,
I responded by saying, “The two things in life you can
count on are death and taxes.” That is, until June 7, 2001,
when President Bush signed comprehensive tax law changes
that eliminated the federal estate tax–a miracle many
of us never expected to happen.
In order to understand the benefit of the new changes, it is
important to understand what the estate tax is and how it
worked under the laws prior to June 7. The estate tax: An individual’s estate is generally considered to consist of all of the property owned by that individual at his death (such as cash, stocks, retirement plans, life insurance, real estate, etc.). The estate tax is a tax imposed on an individual’s estate at the time of his death, and the tax is paid out of the estate before the deceased individual’s family or loved ones receive any of the property from the estate. Historically, many Americans have seen
the tax as Congress unfairly taking
property that they worked their entire lives to accumulate.
Under the laws prior to June 7, the estate tax was imposed on
the entire fair market value of the estate on the date of
the Individual’s death, and the maximum tax could
reduce the entire estate by as much as 55 percent of the
total estate. The
deceased individual’s family and loved ones could end
up receiving less than half of the property that the
individual accumulated during his lifetime.
However, in an effort to provide some
relief from the estate tax, Congress
provided every individual in the United States the right to
leave $675,000 tax-free to family and loved ones.
The problem with the estate tax has always arisen when an
individual’s estate exceeded the $675,000 tax-free
amount. The changes:
With the new changes, the estate tax remains in effect through
2009. However,
starting in 2002, the amount of an individual’s estate
that passes tax-free increases to $1 million, and that
tax-free amount gradually increases to $3.5 million by the
year 2009. At
the same time, the maximum tax rate of the estate tax
gradually decreases from the current 55 percent to 45
percent in 2009. Then, in 2010, the estate tax is completely repealed. The estate of any individual dying on or after January 1, 2010 will not be subject to any estate tax, which means that the entire value of the estate will pass tax-free to the deceased individual’s family and loved ones.
This complete repeal of the estate tax is exactly the miracle
for which many Americans have hoped for years. Or is it? The Myth:
While many have celebrated the repeal of the estate tax, few
have recognized one important provision of the new tax
changes. On
January 1, 2011, the estate tax repeal is repealed.
Said another way, as of January 1, 2011, Congress reinstates
the estate tax, and at that time, the estate tax laws revert
back to the provisions in effect before the June 7 changes.
To many, it appears as though Congress is taunting Americans
by repealing the estate tax and then reinstating it merely a
year later.
Many of my clients have asked me what this repeal, which seems
mythical to them, means in terms of their estate planning,
and I have told them, jokingly, that they should plan to die
in the year 2010 because that is the only year in which they would not have to pay any estate taxes. Since forecasting one’s death is not
a viable option, I routinely advise clients that they should
approach their estate planning with the expectation that
their estate will be subject to some level of estate tax.
In the meantime, we can all hope that
Congress will extend the estate tax repeal so that death and
taxes are no longer synonymous. By
Don D. Ford III Ford
& Mathiason LLP Don D. Ford III is a partner in the law firm of Ford & Mathiason LLP. His practice focuses exclusively in the areas of Estate Planning, Probate, and Guardianship law. |
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