Will the Federal Estate Tax Go Away in 2010?

October 27, 2009

Many of you may remember that back in 2001, Congress enacted legislation that was supposed to have repealed the Federal Estate Tax (the "FET"). However, anyone familiar with the Tax Reconciliation Act of 2001 (the "Act") knows differently.

In general, estates are only subject to FET if they exceed the Applicable Exclusion Amount (the "Exclusion"). Instead of permanently repealing the FET, the Act gradually increased the Exclusion from $1 million in 2002 to $3.5 million in 2009. In addition, the maximum FET rate was lowered from 50% to 45% over the same period. The Act is then scheduled to repeal the FET, but only for 2010. Starting in 2011, the FET reverts to pre-2001 levels with a $1 million Exclusion and a maximum rate of 55%.

Consequently, this leaves it to the current Congress to pick up where the Act left off and either make the one-year repeal permanent or extend the FET at or near current levels into 2010, and beyond. The Wall Street Journal recently reported that the House of Representatives is working on legislation to fix this matter permanently. 

The House legislation would continue the 2009 estate tax parameters indefinitely. It would exempt estate wealth under $3.5 million, or up to $7 million for a married couple, and tax inheritances above that amount at 45%.”

While the main intention is to set the Exclusion and maximum FET rates at current levels, there may be some dispute from lawmakers seeking a higher Exclusion.

As the end of the year is rapidly approaching, this legislation must be addressed in the near future. We will monitor the situation, so please check back for any updates.