Remember Benjamin Franklin's brilliant and insightful saying, "In this world nothing is certain but death and taxes?" Estate taxes bring those two certainties together. For the past decade or so, federal estate taxes have been less burdensome, and there's even a tax-free year scheduled. Congress, though, is working right now to keep the taxes just as they are, permanently.
Estate Tax Basics and the Current Law
Estate taxes - sometimes called "inheritance" or "death" taxes - are assessed on your property that's passed on to your heirs after you die. There are federal estate taxes, and many states have them too.
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA), passed in 2001, reduced federal estate taxes a little at time over the past decade. The goal was to spare many heirs and beneficiaries from paying estate taxes. It worked, too. But the clock is running down.
Right now we're in the final stage of EGTRRA's life span. Under EGTRRA, estates that are worth over $3.5 million are taxed at a rate of 45%. Estates worth less than that are exempt - there no tax at all. Also under EGTRRA, the federal estate tax is scheduled for a temporary repeal in 2010, meaning there'll be no federal estate taxes on any estate in 2010. However, the tax is scheduled to return in 2011, and the tax rate will be a whopping 55% on any estate worth more than $1 million.
Both the US House of Representatives and the US Senate are working right now to keep EGTRRA's clock ticking. In fact, the House just recently passed the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009. This law will make permanent the 45% cap on estates worth more than $3.5 million. And it will continue to exempt estates worth less than that. The US Senate is working on similar legislation with the hope of getting a law passed before the end of the year.
Time isn't the only obstacle, either. Lawmakers are split on what to do about estate taxes in the first place. For example, US Representative Steny Hoyer and many of his fellow Democrats argue that the estate tax is necessary to the federal budget. They claim that keeping the current law protects all but the wealthiest of US taxpayers from having to pay the tax.
Many Republicans including Representative Dave Camp think otherwise, however. Not only do they think federal estate taxes should be abolished permanently, but they fear that even with the current $3.5 million exemption, more and more estates will have to pay the taxes in the future.
Get a Plan
Right now it's important for everyone to stay tuned to the developments in Congress and check your estate plan. For many of us, there's no problem if the $3.5 million exemption stays in effect, as planned by Congress. If your estate may be worth that much, you want to take advantage of entire exemption, which takes planning.
If EGTRRA stays in effect, on the other hand, many estates will have to pay federal estate taxes in and after 2011 because of the $1 million exemption. Don't think you have a million dollar estate? You might be surprised. Start adding up your assets and property - your home, stocks, money in bank accounts, cars and insurance benefits. It doesn't take much to reach the $1 million milestone.
Make an appointment to visit your estate planning attorney or other tax advisor as soon as possible. And write, e-mail, or call your representative and senator and voice your opinion on how what you think the future of the estate tax should be. It's your estate, and you should have a say about how big of a chunk of it will go to the government.
Questions for Your Attorney
- It sounds like for 2011 there'll either be no federal estate tax or a $3.5 million exemption, so why do I have to worry about estate planning right now?
- Is all of the estate planning you and I did a few years ago is still good today? Are you going to charge me to review it?
- I live in Florida for part of the year where there's no estate tax, but I live in Michigan for the remainder of the year, and that state has estate taxes. Will estate taxes have to be paid in Michigan? Is there a way I can live in Michigan for part of the year but have my entire estate subject to Florida law?