What's Going on with the Estate Tax?

August 17, 2009

The House of Representatives is likely to propose a temporary, one-year measure to prevent repeal of the estate tax, as time is running short for a bipartisan group of senators to agree on a permanent rate by the end of this year.

Pursuant to the current law, there will be no estate tax in 2010, but only for one year.  If nothing is done, following one year of estate tax repeal, in 2011, the estate tax rate will to revert to 55% for estates above $1 million.

Congressional sources indicate the House of Representatives may vote to cancel the one year estate tax repeal and extend the 2009 estate-tax rates for another year. At current levels, the first $3.5 million of estate wealth is exempt from the tax. Above that amount, wealth is taxed at a 45% rate.   With proper estate planning, married couples can shelter an amount equal to two times the estate tax exemption amount, through credit shelter trust planning.

Some Washington lobbyists say there is still a chance for Senate Republicans and Democrats to strike a deal this year for a permanent rate structure more favorable to wealthy taxpayers. Sens. Blanche Lincoln (D., Ark.) and Jon Kyl (R., Ariz.) in April won support from a majority of the Senate including 11 Democrats for an amendment that would have exempted estates under $5 million and set a 35% rate.

However, the chances for any Senate deal on estate taxes depend on the availability and the negotiating skill of Senate Finance Chairman Max Baucus (D., Mont.) Sen. Baucus has been leading daily Senate negotiations on health care, a process that is expected to continue into autumn.

So far now, the fate of the estate tax remains unresolved.  Of course, this or another Congress can always revisit the estate tax or any other law later.  So even if the estate tax law if finally corrected, it can always be changed again later.  That is why it is important for revocable living trusts and durable powers of attorney to contain a power to adapt to changing laws.

Andrew Byers is an Elder Law Attorney in Auburn Hills, Michigan.  Estate planning, including credit shelter and other estate tax planning are part of our elder law practice.