Introduction: You are probably
aware that President Obama signed the Tax Relief Act on December 17,
2010. That law created a number of changes and updates that probably
will affect you. Let’s talk about its effect on the death tax
(officially known as the Estate Tax). We will deal with the
exemption change this month and what is known as the portability of
the exemption next month.
History: You may recall that in 2001,
as part of President Bush’s tax goals, the death tax law experienced
some major changes. First, the exemption amount (that amount of
one’s estate that would not be subject to tax on death) was
increased in steps from $675,000 in 2001 to $3.5 million in 2009.
The final phase was to do away with the tax entirely in 2010.
Reportedly, the only way the Republicans could get enough support
for this legislation was to agree to have it expire in 2011 when the
exemption amount would revert back to $1 million.
For years, the consensus amongst estate planning attorneys was that
sometime prior to 2010 Congress would act to make the $3.5 million
exemption permanent (or maybe even increase it). Congress was close
to taking this action on a number of occasions prior to 2010 but
never did. So year 2010 arrived and no one quite new what to make of
it. Would Congress act sometime prior to Sept 1, 2010 which would be
the first day that death tax returns would be due for persons dying
in 2010 and would the law be retroactive? Even that deadline came
and went with no action by Congress.
Exemption Amount: Finally, as
2010 was about to pass into history, Congress did act. First, they
raised the exemption to $5 million. Unfortunately, no cost of living
adjustment was provided.
What of the
Future for the Exemption: Here’s where Congress failed us.
Again, reportedly to get enough votes for passage, Congress
compromised. The $5 million exemption is only good for two years. In
2013, the death tax is scheduled to return to $1 million. Will it?
That depends on your own crystal ball.
So What Should I do? We
recommend to our clients that we get together every two years to
review where they are as far as net worth and where the law is. It
is only by reviewing things periodically that one can feel
comfortable that the person is on the correct course.