"No News Is No News" on the Future of Estate Taxes

11/20/2009 Articles

Many of you have asked about the future of federal estate taxes. Will the federal estate tax disappear in 2010, as scheduled? Will the estate tax exemption amount go up or down? The answer so far is "who knows?"

Current Law. As many of you know, the exemption per person from the federal estate tax in 2009 is $3.5 million, with a 45% tax on amounts in excess of the exemption. This means, in general terms, that a married couple is able to shield up to $7 million of assets from federal estate tax. For those who live in California, there is no California inheritance or estate tax.

The current federal tax law provides that as of January 1, 2010 (just weeks away) there will be no federal estate tax charged to the estate of a person who dies in 2010, regardless of the value of the estate. Current law goes on to provide that in the following year, 2011, the federal estate tax exemption will drop down to $1 million per person, and the tax rate for amounts over $1 million will rise to 55%.

Throughout 2009, the word on the street has been that Congress will pass legislation before 2009 year-end to avoid the loss to the treasury of all federal estate tax in 2010. So far, though, no bills have passed Congress.

Congressional Proposals. So what's happening? Here are some of the proposals that are being considered:

• A House Ways and Means Committee plan proposes a 1-year extension of the 2009 exemption of $3.5 million and 45% tax rate for amounts over $3.5 million. In response, some say that a single-year extension might make future planning for families and family-owned businesses even more difficult, since there would be no clear direction for the future of the federal estate tax after 2010. As of November 19, 2009, support for this proposal may be declining.
• A bi-partisan House bill (H.R. 3905) would extend the $3.5 million exemption and 45% tax rate through 2010, followed by a 10 year phase-in period to raise the exemption to $5 million and to reduce the tax rate to 35%. To date, this proposal seems to have support in both the House and the Senate.
• A Senate Finance Committee bill (S. 722) would freeze the exemption amount at $3.5 million, followed by further exemption increases indexed for inflation.

We'll be in touch with you as we learn more about the changing estate tax situation.

If you would like to discuss any of the issues raised in this Farella Family Wealth Update, or any other estate planning concerns, please contact your Farella Family Wealth attorney at 415-954-4400 or 707-967-4000.