One of the biggest hot-button issues in the world of estates these days is the status of the US federal estate tax. The current legislative regime is set to expire at the end of 2012 and, now that the election is over, Congress is being called on to act and provide certainty so that Americans can adjust their estate plans accordingly.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) was passed by Congress and signed into law by President Barack Obama in December 2010, as part of an economic recovery regime designed to combat the effects of the now ubiquitous recession. The Act sets the lifetime exemption at $5 million per person (currently $5.12 million due to inflation adjustment), with a 35% maximum tax on anything over that threshold.
The Act also introduced “portability” to the credit, thereby allowing a surviving spouse to use the portion of the predeceased spouse’s credit that was not previously used. For example, if one spouse dies having used $3 million of their credit, the surviving spouse is entitled to increase their own $5 million limit by their spouse’s “unused” $2 million.
The Act is set to expire at the end of this year. Barring congressional action, the lifetime exemption will drop from $5 million to $1 million and the top federal estate tax rate will jump from 35% to 55%. Portability between spouses will also disappear.
According to a recent article by Florida Elder Law and Estate Planning attorney Joseph Karp, the Republicans support a total elimination of the estate tax, while the Obama administration supports a middle ground: a $3.5 million lifetime exemption and 45% top rate with portability remaining in effect. A pre-election article from the Wall Street Journal suggests that portability will remain in effect as it “enjoys bipartisan support.” It is not known, however, how the numbers will shake out or when Congress will formally address the looming issue.
These uncertainties are causing American estate planners significant consternation. They are unable to advise their clients through a crystal ball. With the election now over, the Presidency and Senate remain in Democratic control, while the Republicans retain the House of Representatives. The two parties will need to bridge the gap between their positions to provide the American public with a clear picture of how their estates will be taxed after death. Here’s hoping it happens sooner rather than later.
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