NB: This article was published on July 25, 2012 and contains information that may be outdated. For current information regarding the estate tax, read: Estate Tax Certainty…For Now.
On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 into law, which sets the federal estate tax rate at 35 percent for individual estates valued at over $5 million.
It also allows portability of the estate tax exemption between spouses. Any part of the estate tax exemption that has not been used by a predeceased spouse who dies after December 31, 2010 can be transferred to the surviving spouse for use in addition to the surviving spouse’s exemption.
In states without a state estate tax, some moderately wealthy couples who have had their estate planning done in the past couple of years have forgone tax planning in their wills, relying on the $5 million exemption and portability. Relatively few Americans have a net worth of over $5 million, let alone $10 million, so they opted for simple wills instead.
If you have an estate valued at over $1 million and have a simple will, it may be time to contact your estate planning attorney. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 is scheduled to expire on December 31 of this year.
If Congress doesn’t pass new legislation before then, the exemption amount drops down to $1 million, with a tax rate of 55 percent for anything that exceeds that, and portability disappears.
What are the chances the law may expire?
Last fall, rumors circulated that the Congressional super committee tasked with creating a plan to reduce the national would recommend reducing the $5 million estate, gift, and generation-skipping transfer tax exemption in an effort to raise revenue. Rumors fizzled along with the super committee.
And just last week, there was news that Democratic leaders were eliminating a provision setting the maximum estate tax rate at 45 percent for estate valued at over $3.5 million from a bill extending the Bush-era tax cuts for those earning less than $250,000 in order to shore up support for the bill.
The estate tax is a controversial topic which lawmakers seem reluctant to tackle in this election year. With the election looming and government more polarized than ever, it is looking less likely that new legislation will be passed before the end of the year.
What is the future of the estate tax?
If Republican candidate Mitt Romney defeats President Obama in November and Republicans win control of both houses of Congress, the exemption amount may increase or be repealed completely, since Mitt Romney supports a full repeal of the federal estate tax.
If President Obama wins the election and Democrats win control of both houses of Congress, the exemption amount will likely be reduced to 2009 levels. The new budget proposed by President Obama recently set an exemption $3.5 Million with portability intact. Even at this level, the vast majority of Americans will never have to pay any federal estate taxes at all.
If the election splits control between both parties, as predicted by recent polling data, what will happen beyond this year, as well as the timing of any new law, is anyone’s guess.
Will a compromise ever be reached?
Even if control is split, I think many in Congress will ultimately vote to protect their interests and a compromise will eventually be reached. I read recently that almost half of the members of Congress are millionaires and the average net worth of a current senator is about $2.5 million, which means the higher exemption will benefit their estates.
For that reason, I think that even if the estate tax expires, Congress will eventually pass new legislation that could possibly be retroactive to January 2013. But until then, it’s better to be safe than sorry.