What Is Going On With Estate Tax Laws?

Last week, our client, Early Retiree, heard that estate tax laws were changing in 2010, and she called S. Tate Planner, to discuss the new law. The following is a transcript of the conversation.

Is it true that there is no estate tax in 2010?
Yes and no. There is no federal estate tax in 2010. However, you may be subject to state estate tax. In Maryland, the estate tax exemption is $1.0 million, so net worth in excess of $1.0 million in a deceased estate will be taxed.

What about 2011?
There is a $1.0 million exemption from federal estate tax in 2011. The amount over $1.0 million is taxed at 55%.

I thought the federal estate tax exemption was $3.5 million?
That was in 2009, when the rate was 45%.

You’re kidding, right?

I find it hard to believe that Congress let the estate tax end. Did it create another tax?
Yes, wise Odysseus. In 2010, estates are subject to capital gains tax. This means that the increase in value of certain assets (for example, stocks and real estate) is subject to capital gains tax. For instance, if your father bought a stock for $0.05/share in 1939 and the stock is worth $100/share today, then you owe a 15% tax on the $0.95/share increase in value.

You’re kidding, right?

I am supposed to know what my father paid for all his stocks and his house?
Yes – to some extent. Each of us is entitled to a $1.3-million exemption from this capital gains tax.

Who thinks up these things?

Is Congress going to do anything about this?
Maybe. Congress is talking about passing a law that will reinstate the estate tax. But they are busy with Toyota right now.

Will it be passed this year?
Most likely.

Will it be retroactive to January 1, 2010?
Maybe. Some people say that would be unconstitutional.

What is Congress likely to do?
Reinstate the estate tax from the date the law was passed.

My father died on January 1—what should I do?

Wait for what?
Wait for Congress to act.

You’re kidding, right?
Yes. You should consult an estate attorney to determine the best course of action.

Are there people who can benefit from this change in estate taxes?
Yes. For example, there is no generation-skipping tax in 2010. So, if you would like to leave an inheritance to someone two generations removed (like a grandchild), now is a good time to put the plan in motion.

Are there people who will be hurt by the new rules if they are not changed?
Yes. It’s possible that your money will not pass as you intend, particularly if your will was created before 2004. Everyone should have their will reviewed.

What should I do?
Have an estate attorney review your will and trust documents. If you do not have an attorney (or a will), contact BWFA, and we will help you make sure your estate plan is reviewed and complete.

After I have reviewed and updated my estate documents, what should I do?
Call your member of Congress.