Estate Tax

UPDATE:  As part of the "Fiscal Cliff" deal, Congress voted on January 1, 2013 to make permanent most of the current rules relating to the estate tax.  Under the new law (signed by President Obama), U.S. estate tax law will provide a $5 million, indexed for inflation (so $5.25 million in 2013) per-person exemption ($10.5 million per married couple). The deal raises the highest estate tax rate from 35 to 40 percent.


The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 has changed the landscape regarding estate tax. The New Estate Tax Rules raise the estate tax exemption to $5 Million and lower the estate tax rate to 35%. A "portability" provision of the law also allows married couples to end up with a $10 Million estate tax exemption.

Estates of people who die in 2010 will maintain the 2010 rules, which means no estate tax, however, the estate will be subject to the "modified carryover basis system." Unless their heirs elect to use the new rules, this will result in more taxes being paid.

Deciding which regime is better really comes down to individual circumstances. From an historical standpoint, however, the new estate tax provisions are very generous.

Note that the rest of this page has not been updated. It is still worth reading and considering, however, because the new law is set to expire on December 31, 2012. Barring an act of Congress, this will put us right back in the exact position discussed below.

Of course, this stuff is complicated and we always advise discussing your individual circumstances with an experienced estate planning attorney.


Finally, some good news about taxes! It's 2010 and at this moment the estate tax is no more. There is currently no federal "death tax" in the United States. No matter how big or extensive your assets, this means your estate will pay zero federal estate taxes if you die this year.

BUT -- your estate still might have a state estate tax. We also can’t predict what Congress will do in the future. It may very well make federal estate taxes retroactive to January 1, 2010, in which case your estate will owe an estate tax after all.

And if Congress does nothing? In that case, as of January 1, 2011 we revert back to estate and gift tax rates circa 2002. Under those rates, there will be no estate tax on the first $1 million in estate assets. Anything above $1 million will be taxed at the maximum draconian rate of 55%. Any state estate tax due will go on top of the 55% rate.

Most assume Congress will at least raise the estate tax exemption level. After all, just last year it was as high as $3.5 million. But, then again, no one thought Congress would let the estate tax expire on December 31, 2009 – but it did.

Obviously, trying to predict the politicians’ next move is a nightmare for the prudent estate planner. Probably, the most prudent course is to assume the $1 million credit and 55% tax rate currently in the works and take appropriate steps. Of course, with a $1 million threshold, many people should be concerned about taking steps to minimize their estate tax.

You can read more about the estate tax and how to limit or avoid it at estate tax. The use of a Credit Shelter Trust or A-B Trust is discussed at Credit Shelter Trust. Also, here is updated information about the gift tax and probate tax (which is often confused with the estate tax).

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