The Bush tax cuts, which began in 2001, will expire as 2010 ends. Included in the Bush tax cuts was a reduction in the federal estate tax. From 2001 to 2009, the highest estate tax rate decreased gradually from 55% to 45%, and the maximum amount exempt from estate tax increased from $1 million to $3.5 million. In 2009, the estate tax applied only to the amount exceeding $3.5 million for an individual, or $7 million for a couple’s estate. The estate tax was suspended in 2010, the final year of the Bush tax cuts.
The following chart shows the estate tax rates and exclusions from 2001 through 2010. (Note 1.)
|Year||Highest Estate and Gift Tax Rate||Amount Exempt from Estate Tax|
|2010||Top Individual Rate (for gift tax only)||Unlimited – Taxes Repealed|
Billionaires who died in 2010 will not owe the estate tax. Dan L. Duncan, a Texas magnate who owned natural gas processing plants and pipelines, died in March 2010. His estate will be subject to capital gains tax as applicable, but not the estate tax. Only “about 5,500 estates a year” are subject to the federal estate tax, according to the New York Times. (Note 2.)
A Boston-based lawyer (unaffiliated with our company) is representing a 93-year-old widow whose husband died in 2010, leaving her a $20 million estate. The widow intends to disclaim her share so that the inheritance will pass tax-free to her children. (Note 5.)
The U.S. Senate defeated a Republican-sponsored bill on July 21, 2010 to repeal the estate tax permanently. (Note 3.) Conversely, the Senate has not reached any agreement to reinstate the estate tax retroactively in 2010.
If Congress takes no further action, the estate tax will resume in 2011 at the 2001 highest rate of 55% with a $1 million exemption for an individual ($2 million for a couple). Several other proposals are being discussed. President Obama and some lawmakers support reinstating the estate tax at 2009 levels. Many Republicans prefer a bill proposed by Senators Blanche Lincoln (D-Arkansas) and Jon Kyl (R-Arizona) to enact an estate tax at 35% with a $5 million exemption for an individual. (Note 4.)
Estate planners will be watching to see what rates and exemptions the U.S. Senate will choose for the estate tax in 2011.
UPDATE: The estate tax resumes in 2011 with a $5 million exemption ($10 million for couples) and a 35% rate, per legislation passed in December 2010.
2. “Legacy for One Billionaire: Death, but No Taxes” by David Kocienewski. The New York Times, June 8, 2010.
3. “Estate Tax Vote: An Issue in Fall Vote?” by John D. McKinnon. Washington Wire (The Wall Street Journal Blog). July 21, 2010.
4. “Some Small Businesses Glad To Pay Estate Tax” by Andrea Coombes. The Wall Street Journal, November 18, 2010.
5. “Planning for Income and Estate Taxes in an Uncertain Time” by Paul Sullivan. The New York Times, November 12, 2010.
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