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The State of the Estate Tax
by   Mark Wade  

The estate tax has been a moving target for the past ten years, phasing itself out with each passing year until it disappeared entirely this year. But it's still scheduled to return in 2011, with an exemption of only $1 million (as opposed to $3.5 million last year) and a maximum tax rate of 55 percent (as opposed to 45 percent last year). Those new rates take effect on January 1, 2011 - but we'll also be seating a brand-new Congress on January 20, 2011. The Democratic-controlled Congress had every opportunity to change this situation and chose not to; a Republican-controlled Congress will be more likely to take matters into its own hands.

But if you're curious as to how we got to such a level of uncertainty in the first place, it was a Republican Congress that put this plan into motion. When the GOP took over both houses of Congress in 2001, the estate tax rate stood at 55 percent, with an exemption of $675,000. They gradually lowered the tax rate throughout the decade down to 45 percent in 2009, raised the exemption to $3.5 million, repealed the tax in its entirety for 2010, and then reinstated the estate tax, on its 2001 terms, starting in 2011, unless Congress acted to the contrary. That effort culminated in the situation we have right now, with no estate tax in effect - but the law was also set to expire at the end of 2010. That means that without further legislation, the tax will revert back to a 55 percent rate with a $1 million exemption.

It's possible that the lame-duck Congress, which also is expected to address the similarly expiring Bush tax cuts, will pass new estate tax legislation as well. The most visible Democratic proposal, from Senate Finance Committee chairman Max Baucus of Montana, would set the new estate tax to its 2009 levels: a rate of 45 percent, with an exemption of $3.5 million.

Without action by the Democrats, the responsibility would probably fall to a Republican Congress. If thatís the case, perhaps the most likely plan is the one floated by Senate Minority Leader Mitch McConnell of Kentucky. McConnell would raise the exemption level to estates worth more than $5 million, and lower the tax to 35 percent Ė in other words, what might have been the next level after the last iteration of the income tax, in 2009. Other Republicans have gone even further, calling for the elimination of the tax on a permanent basis.

That would give us a landscape such as we've had for the past year, although you shouldn't mistake the repeal of the estate tax in 2010 as the elimination of all taxes owed upon someoneís death. The same legislation that repealed the federal estate tax for people dying in 2010 also repealed the basis adjustment rules as well, possibly creating instances where estates could owe capital gains tax. Prior to this year, a person inheriting from an estate was not liable for any appreciation occurring prior to the decedentís death. For example, if your grandfather died in 2009 and left you $100,000 worth of stock that he had originally bought for $40,000, his estate wouldn't owe any federal estate tax on the stock (unless the entire estate was worth more than $3.5 million), nor would you owe any capital gains tax if you sold the stock for $100,000. If your grandfather instead died in 2010, his estate would still not pay any federal estate tax, but you may be liable for capital gains tax on the $60,000 of appreciation occurring prior to your grandfatherís death.

The message, as always, is good planning produces good results, and no planning produces bad results. Even in periods where there is no federal estate tax, estate planning is still a must. Leaving a sizable estate to your heirs will nearly always leave a great deal of work to be done on their behalf, as well as a potentially hefty tax bill. Careful strategizing on your part now will allow you to address the vagaries of the estate tax, whether through trusts for your heirs, tax-avoiding financial gifts, or charitable gifts to benefit your favorite nonprofits, and help you preserve your hard-earned assets for your family. No matter what the size of your estate, or the state of the estate tax, we here at Echelon Wealth Strategies can help you plan for your and your heirsí future. For more information, give me a call at 908-647-6000 or send an email to


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