NB: This article was published on December 7, 2010 and contains information that may be outdated. For current information regarding the estate tax, read: Estate Tax Certainty…For Now.
If you’ve tuned in to your favorite television news show or read your local newspaper, you’re probably aware that the estate tax is about to return. And the opponents of the so-called “death tax” are portraying this as a very scary thing.
For example, a few weeks ago, Wyoming representative Cynthia Lummis told reporters that the possible reinstatement of the estate tax has some so worried that they are choosing to prematurely end their lives before year end. And in the video below, Representative Steve King of Iowa says that if Congress does not address the estate tax before the end of the year, he fears there will be families standing around the death beds of loved ones, making life and death decisions based on tax liability. “That is cruel,” he exclaims.
The estate tax is probably the most hated tax in the country, perhaps because many people believe that everybody who dies will be affected by it. This is not the case. Although every U.S. citizen is subject to the estate tax, the vast majority will never have to pay any taxes at all because a certain amount of a person’s estate is exempt from taxation.
For example, in 2009, the exemption amount was $3.5 million. In other words, $3.5 million of assets could be transferred without any federal estate tax liability. In that year, only 0.25 percent of estates were taxable. In real numbers, out of the more than 2.4 million people who died in 2009, only about 5,500 had estates large enough to pay any estate taxes at all.
And even if the estate tax returns next year with a $1 million exemption, 98 percent of Americans won’t be affected. If your estate is valued at less than $1 million, not one penny of federal estate taxes will be due. Nothing at all.
Neither Republicans or Democrats want the exemption amount to drop to $1 million because it would potentially affect and harm more middle class families. For example, if you’re a middle class parent of young children and have a sizable insurance policy, the value of the policy could easily drive the value of your estate above the $1 million exemption amount and expose you to estate tax liability.
Unfortunately, that’s the only thing the two parties agree on. The debate on the estate tax has been ongoing since the beginning of the year without resolution. Republicans want to increase the exemption amount to $5 million and reduce the tax rate to 35 percent, or eliminate the estate tax altogether, while most Democrats and President Obama want the exemption amount to be at last year’s level.
Whether the exemption amount is $3.5 million or $5 million is irrelevant for 99.7 percent of Americans. But if the estate tax exemption falls to $1 million, about 2 percent or 44,000 estates will be affected each year. That’s still statistically a small percentage, but will require more people to take advantage of estate planning strategies that minimize estate tax liability.
Will people really make life or death decisions based on the status of the estate tax laws? The idea that people will be standing around a hospital bed on New Year’s Eve contemplating whether to terminate the life of an infirm loved one in order to avoid paying more estate tax is unfathomable to me. I don’t know whether these anecdotes are true. Maybe I’m naive. Perhaps I don’t possess the net worth that makes people willing to consider choices like these.
Regardless of what Congress decides, It’s important to put the estate tax laws in perspective. More than 98 percent of Americans will never pay any estate taxes. And for those that have taxable estates, estate planning techniques can minimize their tax liability.
In the end, it’s really just money. The life of a loved one, on the other hand, is priceless. I like what my colleague, Hani Sarji, wrote in a recent article on the subject: “Money is fungible and can be replaced. People are unique and irreplaceable.”