Proposed Estate Tax for 2011- Maybe

With plenty of time left in 2010 (insert sarcasm tone), Congress is moving towards modifying the federal estate tax system. Here is a quick summary of where we are currently, where will be if they don't pass anything, and what the current bill ("Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act Of 2010") would provide. (Disclaimer: this is the quick and dirty summary for discussions at holiday parties and should not be relied upon as an extensive analysis.)
  • What we had in 2009 - $3.5 million exemption per person, 45% tax rate
  • What we had in 2010 - No federal estate tax. "Carryover basis" on inherited assets, with limits.
  • What we will have in 2011 with no change - Federal estate tax for estates greater than $1 million, with a rate of up to 55%.
  • Under the current proposed bill - $5 million exemption, 35% tax rate above that.
One of the more interesting items in the proposed bill includes a "portability" provision. Historically, in order for both spouses to maximize their total available exemption amount, assets had to be titled in a certain manner and different drafting provisions were necessary. ("Use it or lose it" was the message.) The portability provision would provide that if a spouse didn't use their exemption, their spouse could use it. Thus, it could be possible for a surviving spouse to actually have a $10 million exemption available at death and pass $10 million tax free to their beneficiaries.

This portability will be interesting as to how it gets applied. It will change the way attorneys plan for their clients. Assuming this bill passes, of course.


Jeff N. said…
Mr. Gardner,

Do you think the exemption amount will stay at its current rate as indexed for inflation past 2012?

Also, are you relying on portability as a permanent planning technique, replacing A/B trusts?

Thanks for your insights.

Jeff N.
Drake Law Student
Matthew Gardner said…
Good question. I predicted that we would not see repeal in 2010 and that we would have an exemption of $3.5M for 2011. I'm 0 for 2, so obviously I have no insight.

Given my track history, I still think it will be indexed and I think it will keep portability. Historically, it has not gone backwards and once you give a convenience (portability) it is hard to take it away.

Good luck in school Jeff.

Matt Gardner

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