Proposed Temporary Estate Tax Rate of 35% and $5 Million Exemption

In 2009, the federal estate tax reached an exemption of $3.5 million. During 2010, the estate tax disappeared for one year. Now that we are on the eve of 2011, Congress is trying to address numerous tax increases that will take effect on January 1, 2011. One tax increase on the books to take effect on January 1, 2011 is a return to a $1 million estate tax exemption. Yesterday, Republican members of Congress and President Obama struck a deal to temporarily reinstate the federal estate tax exemption at $5 million per person, beginning with deaths that occur after December 31, 2010. This means that the estate tax will not be imposed upon a person’s estate unless the person’s taxable assets exceed $5 million. Under this compromise, the proposed estate tax exemption would be law for only two years. Again, this is only a temporary adjustment. Current law on the books would return the estate tax exemption to $1 million and estate tax rate to a maximum of 55% for deaths in 2013 and after. The proposal would also include portability of exemption between spouses so that a married couple could transfer $10 million without complicated bypass trust planning.

Unfortunately, this is a deal between Republican members of Congress and President Obama. Now President Obama has the ill-fated task of convincing Democrat members of the House and Senate to approve this compromise. It has been reported by the press that many Democrats do not support an increase in the estate tax exemption to $5 million; nor do they support an estate tax rate of 35%. In addition, President Obama said, “Republicans have asked for more generous treatment of the estate tax than I think is wise or warranted.” He also stated that this is “generous treatment” and is “temporary.”

Although not reported yet, we can assume the federal lifetime gift tax exemption will remain at $1 million and the generation skipping transfer tax (“GSTT”) exemption will also increase to $5 million, but details related to gift tax and GSTT tax have not been circulated.

Certainly, Congress will be working overtime as the Christmas break approaches to try and pass the proposed legislation, but there has already been word of lack of support in the U.S. Senate. This proposal is not law; but, we could see passage of this proposal before Christmas. Of course, we all know that strange things can happen. Everyone thought Congress would act last year at this time to avoid a year without any estate tax, and Congress failed to pass legislation. At that time, no one thought we would see 2010 be a year without any estate tax. Are we in for a repeat or will a lame duck Congress and the President actually pass this proposal? Stay tuned.