by Michael Ettinger, Esq.
The year 2001 was a space odyssey in more ways than one. It was also the last time we faced Federal estate tax rates as high as 55%, and exempt amounts as low as one million dollars. Nevertheless, this appears to be what we are going to see take effect on 1/1/11, due to the expiration of Bush era tax cuts enacted in 2001. No one would have predicted what has come to pass.
Taking effect on January 1, 2002, The Economic Growth and Tax Recovery Act was to be amended at some point during the next nine years. It was widely expected that something close to the high water exemption of 3.5 million dollars, existing at the end of 2009, would be made permanent. Health care reform, however, dominated the legislative agenda at the end of 2009, pushing estate tax reform to the sidelines. Political bickering then prevented an extension of the 2009 exemption, at least until a solution was found.
Then came 2010, the year of no Federal estate tax. This saved, amongst others, the late George Steinbrenner's family an estimated 500 million dollars in estate tax and probably allowed the Steinbrenners to keep ownership of the New York Yankees in the family as well.
The predictions of the majority of pundits, of a fix occurring in 2010 with retroactive application to January 1 of this year, have not panned out. Instead, over the past summer, one poll of attorneys, accountants and trust officers found that 68% believe that nothing will happen in 2010 to remedy the estate tax problem with one wag adding "nothing is what they do best".
Some commentators feel that each party now has a stake in the reversion to the one million dollar exemption. For the Democrats, they say, it is a "revenue raiser" without a tax increase. For the Republicans, they say, it is both a campaign issue and a significant fund raising issue.
The latest news from thehill.com is that Senate Majority Leader Harry Reid (D-Nev.) will bring the issue up this month with a possible package hitting the floor in late September. Nevertheless, one sticking point unlikely to be resolved are the opposing forces of those in favor of extending Bush era tax cuts for income earners over $250,000, on the basis that this group tends to prop up solely needed consumer spending, versus Obama's campaign pledge to raise tax rates for families earning over $250,000.
With the added tumult of the run up to the mid-term elections, it is difficult to see how issues as polarizing as income and estate taxes, unresolved for nine years, will suddenly be settled.
With a 55% Federal estate tax looming, now is the time to be talking to your estate planning lawyer. If you are married, you may double the one million dollar exemption by splitting your estate with your spouse into two estates, preferably using trusts to avoid having to probate the estate twice. Keep in mind that your estate consists of all of your assets, including any life insurance that you own. On a two million dollar estate, your tax savings for planning ahead would amount to $550,000. This type of estate planning must occur before the first spouse dies to maximize the amount that may be sheltered.