Tax Law

Estate Tax Reinstated

Over the last few weeks we all have been diligently watching and waiting to see what would become of the Bush tax cuts and while most would agree that a continuation of at least some of the tax cuts were necessary to keep the economy moving forward, it was the estate tax that was the sticky spot.   Republicans were determined to include in the tax legislation an estate tax that provided a higher exemption amount but a lower top tax rate than what existed in 2009.   Democrats vigorously argued for a reinstatement of the estate tax at 2009 levels.  The Democrats were quick to point out that Republicans were willing to forgo necessary tax cuts to the middle class so that the wealthiest 6,600 estates could enjoy tax savings. See 2010 TNT 243-70.

When comparing the 2009 level with the tax cut compromise level we see that the 2009 level with a $3.5 million exemption and a 45 percent top tax rate would tax .25 percent of all estates. The compromise level with a $5 million exemption and a 35 percent top tax rate would tax .14 percent of all estates. See 2010 TNT 240-24. This difference seems fairly insignificant until you take into account that the compromise level will result in a loss of approximately $23 million in revenue over two years. This is revenue that could be used to reduce the federal deficit.

Despite Democrats' efforts to make changes to the estate tax, the Republican Party enjoyed victory as President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  The new Tax Relief Act reinstates the estate tax for 2011 and 2010 with a $5 million individual exemption which is modified for inflation beginning after 2011 and a 35 percent top tax rate. For the estates of decedents dying in 2010, executors will have the option to either elect the new exemption amount and tax levels or remain with the 2010 law of no estate tax and modified carryover basis rules. The law also expands the lifetime gift exemption to $5 million ($10 million for couples) and imposes a 35 percent gift tax on amounts over that threshold through 2012.

Although the legislation has been signed the fate of the estate tax is far from over.   As noted above, the estate tax is only reinstated for two years ensuring that come election time the estate tax is sure to be a hot topic. 


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