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Are You Ready for the Return of the $1 Million Estate Tax Exemption?

  • December 3rd, 2010

There is a lot of talk in Congress about preserving tax cuts for the wealthy, but in fact lawmakers have unwittingly created an incentive for the very affluent but ailing to die before the year is out. As the capstone (or should we say headstone?) to one of the signature Bush tax cuts, the estate tax has been repealed for all of 2010. But this windfall to the wealthy is scheduled to expire on January 1, 2011, when the estate tax will return with a vengeance. Estates valued at more than $1 million will pay a tax of 55 percent -- rates that haven't been seen in a decade.

This will happen, that is, unless the lame-duck Congress can reach an agreement on an alternative plan. Lawmakers are divided into three basic camps on the issue and so far haven't been able to come to terms. Some Republicans, such as South Carolina Senator Jim DeMint, favor permanent repeal. Many Democrats, including Majority Leader Harry Reid (NV), support reverting to the rules that applied in 2009 -- allowing $3.5 million of an individual's estate ($7 million for a married couple) to pass to heirs tax-free before a tax rate of 45 percent would kick in. A third faction, supported by Senate Republican leader Mitch McConnell (KY), is holding out for a $5 million exemption and a top tax rate of 35 percent.

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The betting is that lawmakers will reach agreement and raise the 2011 exemption at some point, but perhaps not until the next session of Congress. Right now lawmakers have their hands full just trying to settle on whether the Bush tax cuts should be extended for all taxpayers or only to those earning less than $250,000 a year. Said Senate Finance Committee Chairman Max Baucus (D-MT), "We're barely talking about [the estate tax], let alone ready to make a decision."

According to Bloomberg News, the Congressional Research Service (CRS) estimates that the Democratic majority's proposal of a $3.5 million exemption would subject just 0.25 percent of U.S. estates to any tax in 2011 and generate $18.1 billion in revenue. The Republicans' proposal of a $5 million exemption would involve only 0.14 percent of estates paying any tax and would generate $11.2 billion, according to the CRS, while the $1 million exclusion that will be in the tax code if Congress does nothing will affect 1.76 percent of estates and generate $34.4 billion in revenue.

If you might be among that 1.76 percent and "death is on the horizon, take advantage of every simple legal loophole to reduce the size of an estate," warns the Wall Street Journal. This could include annual gifts under the $13,000 gifting threshold, medical care payments, or even taxable gifts and generation-skipping and other trusts. But, as the Journal warns, going the latter two routes "requires good legal help and planning." Also, as Massachusetts ElderLawAnswers member Hyman Darling notes in his blog, now may be the time to take advantage of other comparatively relaxed gifting rules in light of what may be down the road. For details, click here.

For more on the implications for middle class taxpayers of the repeal of the estate tax in 2010, click here.

Last Modified: 12/03/2010

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