Look For Changes in the Estate Tax Laws In the Fourth Quarter of 2009

By Denice A. Gierach – August 1, 2009

Back in 2001, there was a major change in the estate tax law. One part of this change involved the amount of exemption for federal estate taxes. The significance of the exemption amount is that when a person dies, the total of their assets must exceed the exemption amount before their estate was required to pay any federal estate taxes.

The 2001 law set the amount of the exemption beginning in 2002 at $1.0 million and raised that amount in the subsequent years to an amount of $3.5 million in the year 2009. The law then eliminated federal estate taxes for the year 2010, meaning that if a person died in that year, no matter how much that they owned at death, there would be no federal estate taxes. Their estates would not receive the stepped up basis of fair market value as of date of death if the person died in 2010, resulting in potential capital gains taxes instead when the assets owned by the decedent were sold. According to this 2001 tax law, in the year 2011, the federal estate tax would come back to life and the exemption amount would be $1.0 million (not the $3.5 million from 2009).

Now that we are coming closer to the year where there are no federal estate taxes and the year in which the exemption is substantially lowered, there is much activity in Congress concerning what should be done about the federal estate tax. With no federal estate tax in 2010 and a very low exemption, the chances that Congress will fail to amend the provisions concerning the exemption amount are almost nil.

There are at least four bills before either the House Ways and Means Committee or the Finance Committee. Three of the bills have an exemption of at least $3.5 million, one of them has an exemption of just $2.0 million. One of bills increases the exemption amount over time to $5.0 million by 2015. Three of the bills have included provisions to allow for the portability of the exemption between spouses. What this means is that if the first spouse to die does not use all of his or her exemption amount because he or she had insufficient assets, the unused portion can be carried over to the surviving spouse to be used at his or her death.

Assuming that the exemption amount remains at $3.5 million or increases to $5.0 million, there may be a planning opportunity for many people who presently have one trust for each spouse. If the total of the assets held by both spouses is under the exemption amount and is expected to be under that amount, people may be able to use one joint trust (instead of the two trust scenario), which will simplify the estate planning for many individuals.

While all of this is uncertain at this time, and is especially uncertain in view of the significant spending bills that have passed through Congress in recent times, one thing is for sure—Congress will act on this change sometime this year yet. If it happens to go into 2010, the provisions will probably be made retroactive to the beginning of 2010.