NO FEDERAL ESTATE TAX IN 2010 AS SENATE FAILS TO TAKE ACTION ON HOUSE BILL

With the U.S. Senate preparing to adjourn for the remainder of 2009, the federal estate tax will automatically expire for a single year beginning at 12:01 a.m. on New Year’s Day. The result: Wealthy Americans dying in 2010 might escape the dreaded tax. The operative word here is”might” because, according to the NY Times (Dec. 18), the Democratic Congressional leadership is already promising a full restoration of the estate tax, along with a retroactive effective date of 01/01/10, as soon as both houses reconvene next month for business.

Indeed, the House of Representatives recently enacted legislation which, had it been approved by the Senate, would have made the estate tax a permanent fixture of the Internal Revenue Code beginning New Year’s Day, 2010. The House bill provided that the exemption amounts would be set at $3.5 million (for singles) and $7 million (for married taxpayers), with a maximum tax rate of 45 percent. (By comparison, the top tax rate back in 2001 was 55 percent.) Unfortunately, the Senate has been so embroiled in debate over the health care bill that it never got around to the estate tax.

All this confusion is rooted in 2001 tax legislation achieved by the Bush Administration, Throughout the past decade, that legislation has gradually raised the exemption amounts to the current $3.5 / $7 million, while lowering the estate tax rates. However, the 2001 legislation also provided that: (1) during 2010, there would be no estate tax whatsoever; but (2) on New Year’s Day, 2011, the estate tax would automatically rise from the grave, complete with all the statutory provisions in effect back in 2000.

Since 2001, estate planners half-jokingly have been telling their wealthy clients to postpone death until 2010.

For continuing coverage of the fate of the federal estate tax, stay tuned to the LexisNexis® Estate Practice & Elder Law Center.