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Back in 2001, Congress altered the law on estate taxes, creating estate tax exemptions that altered over the years. For example, in 2008, the exemption from federal estate tax is set at $2 million. If you have one dollar more than that number, your excess will be taxed at 45 percent plus, depending on the amount of the excess.

According to this legislation, the federal estate tax exemption amount was to increase in 2009 to $3.5 million and in 2010, the federal estate tax was eliminated for a year. Although your estate might not be subject to federal estate tax if you were to pass in 2010, your estate will not receive a “stepped up” basis because year. In other words, your estate is “trading” the federal estate tax for the capital gains tax because one year.
As this law now exists, in 2011, the federal estate tax exemption is scheduled to come back at the $1 million

Estate TaxDespite that there is just one year left before the federal estate tax is rescinded and after that bounce back with a $1 million exemption and a greater leading tax rate, Congress has stopped working to act. Some years ago, there was a movement to abolish the federal estate tax completely, as the idea was that a person paid taxes of many varieties all their lives and need to be enabled to move the balance of their possessions tax complimentary to their kids. Regardless of this reality, Congress instead entered into this compromise and has stopped working to place estate tax reform on the front burner.
This lack of action by Congress has actually triggered people to be on a roller rollercoaster, having to monitor their account variations on an annual basis to identify how the law in that year will use to them. The conventional knowledge was that Congress would act at some point prior to the 2010 reset of the exemption to make a more permanent reform. In March, some members of the Senate Finance Committee stated a spending plan resolution that consisted of a nonbinding change that would freeze the estate tax at 2009 levels, indicating that $3.5 million worth of an estate would be exempt (or $7 million for a couple, if effectively structured). The remainder of the estate above the exemption would then be taxed at 45 percent. There have been a number of other propositions put forward, some of which are more generous federal estate tax exemptions.

Until Congress acts, be prepared to ride the roller coaster!