The Future of Estate Tax: Will “13” Prove To Be A Lucky Number?

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In my blog post of November 12, 2010, I made reference to a dinner bet I made with my father as to when a decision would be made on the federal estate tax issue. (Yes, Dad, I haven’t forgotten you were right and I still owe you dinner.)

At that point, we were nearing the end of a year in which there was no estate tax and we were about to revert to a tax, up to 60%, on transfers at death in excess of $1,000.000.

In an 11th hour move on December 17, 2010 President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act into law, which reinstated the federal estate tax – but with a $5 million exemption limit and a 35% tax rate – to begin again January 1, 2011 and to sunset on December 31, 2012. Additionally, the concept of portability of the estate tax exemption between spouses was introduced.

So while we achieved relative certainty for two years, January 1, 2013 now marks the unlucky date of reversion to the $1 million estate tax exemption, estate tax rates as high as 60%, and an elimination of the portability provision.

To provide longer term certainty, President Obama, in his recently proposed 2012 budget, is hoping to change the estate tax exemption to $3.5 million, the same as it was in 2009.

Additionally, he is seeking to reduce the gift tax exemption and GST tax exemption to $1,000,000 with an increase in the estate and gift tax rates to 45%. The proposal includes making portability of the exemption amount between spouses permanent, for a combined exemption up to $7 million.

You can look at President Obama’s approach in two ways. You consider this change as increasing the estate tax (by raising the tax rate and lowering the exemption from its current level). However, you can also consider this reducing the estate tax (by lowering the tax rate and raising the exemption from what would happen in 2013 if nothing were done.)

All I hope for is an end to these constant changes. It will be lucky for everyone when we have certainty, beyond two years, on the issue of the estate tax.

I should note that uncertainty is likely to remain as I doubt Congress will agree with President Obama’s plan. Republicans control the House and they are still looking for a full repeal of what they call “the Death Taxes.”
Thank you to my paralegal, Elizabeth Carter, for help with this post.

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