Senate Finance Committee Chairman Max Baucus (D-MT) introduced legislation (S. 722) the end of March to make “permanent” many of the tax cuts passed in 2001. While the bill also includes changes affecting income taxes, this article focuses on the estate and gift tax terms. (Anyone who has studied changes in tax law understands that “permanent” means anything but permanent.)
If you die in 2009, the estate tax exemption is $3.5 million and the top rate after that is 45%. In other words, if your estate is under $3.5 million, you pay no estate tax. If it’s more $3.5 million, the tax on everything over $3.5 million is 45%.
Under current law, the estate tax disappears in 2010 and then reappears in 2011 with a $600,000 exemption and a 55% top rate.
If passed, S. 722 keeps the $3.5 million exemption (adjusted for inflation starting in 2011) and 45% top rate for all future years – or until Congress changes it again.
It also sets the gift tax exemption to the same amount as the estate tax exemption (plus the inflation adjustments). The gift tax exemption under current law is just $1 million.
Finally, the exemption amount would be “portable” to a surviving spouse. To understand what this means, consider the following facts.
- Husband dies in 2010 with an estate of $2 million of cash and other assets. He also has $3 million in life insurance paid to Wife.
- Wife dies in 2011 with an estate of $5 million.
- The estate exemption in 2011 is $3.5 million.
Even though wife’s estate in 2011 is $1.5 million more than the $3.5 million exemption, her heirs will pay no estate tax. Husband used only $2 million of his $3.5 million exemption. Wife’s estate gets to add the unused $1.5 million from Husband’s estate to her own $3.5 million exemption. Her total exemption becomes $5 million.
To take advantage of this portability, Wife’s estate would have to make an irrevocable election. And the statute of limitations on Husband’s estate would be extended through the end of the statute of limitations on Wife’s estate.
Finally, the total decrease in fair market value of “special use” property for some farm and other real property used in a trade or business would be increased to $3.5 million (also adjusted for inflation).
While there are always exceptions to the rule, if S. 722 becomes law, estate tax planning for all but the wealthiest Americans will be greatly simplified. Most people will no longer need complicated marital deduction and credit shelter trusts. Often life insurance trusts will no longer be necessary.
Soapbox: It’s hard to believe any bill to cut taxes could be passed in a time when Congress appears to be on a spending spree unlike anything seen in American history and our national debt is poised to pass into the stratosphere (if it hasn’t already). However, given that this bill is being introduced by Democrats and supported by Democrats, it seems that Congress is once again only too willing to push the nation’s current problems on to a new generation. We can only hope the need to solve those problems won’t become a crisis before the future arrives.
Sphere: Related ContentRelated articles from WalterBristow.com:
Loading ...
