What Federal Estate Tax?

The federal estate tax expired at the end of 2009. As of January 1st there is no federal estate tax, though the Massachusetts estate tax is still in place.
What Happened?
In 2009 there was 45 percent federal estate tax on the estates of individuals with a $3.5 million exemption. The estate tax expired at the end of 2009, and if Congress does not act there will be no estate tax for 2010. In 2011, the estate tax will be reinstated at a rate of 55 percent with a federal exemption of only $1 million.
Why Did It Happen?
In 2001, the Tax Code was amended by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA had a sunset provision, which said that unless Congress acts before 2011 we will revert to pre-EGTRRA provisions. Pre-EGTRRA, the estate tax exemption was $1 million and the tax rate on assets over $1 Million was 55 percent. Congress was distracted at the end of 2009 and did not act to prevent the repeal of the estate tax.

What Should I Expect This Year (2010)?
Many attorneys believe that the Senate will act in 2010 to reinstate the 2009 estate tax (including the $3.5 million exclusion), and that the reinstatement will be retroactive to January 1st.

There is no guarantee, of course, that the Senate will act, and it may be that the estate tax will remain lapsed this year and revert in 2011. If this happens, in 2010 there will be no estate tax but there will be a capital gains tax (a tax on the difference between the current value of assets and the price of those same assets when purchased). In 2011, the federal estate tax will be imposed on all estates worth more than $1 million.

What Does This Mean for My Estate Plan?
I believe it is likely that the Senate will act in 2010 to reinstate the estate tax, and that the tax will be retroactive to January 1st. If Congress does not act, then the estate tax repeal could hurt the surviving spouse of someone dying in 2010 if the couple has a Marital Trust/Bypass Trust Plan (also known as an A/B plan). Please call my office to arrange an appointment if you have any questions about your estate plan.