Maroney Law Blog

Thursday, January 13, 2011

The Federal Estate Tax Yesterday, Today and Tomorrow

The Federal Estate Tax has been the subject of political turmoil for some time.  After much wrangling, the tax has been “re-set,” but again, only in temporary fashion.  This gives the wealthy and their planners some peace of mind for the near future, but leaves uncertainty going forward.  Thus, we believe a brief summary of the recent past, present condition, and future predictions, warrants a blog from us to you.

A short visit to the recent history of the federal estate tax will show how much it has changed in such a short time.

In 2009 the annual exclusion was $3,500,000. The provisions of the tax law called for the federal estate tax exclusion to be repealed, and to that end, in 2010 there was no federal estate tax.

After the mid-term elections of 2010, Congress revived the estate tax, at least temporarily.   For 2011 and 2012, the estate tax exclusion amount and tax rates have been set at a $5 million applicable exclusion, with assets exceeding that amount being subject to a 35% tax.   

We report that this is a “temporary estate tax,” because under current law, the applicable estate tax exclusion will only be in place for 2011 and 2012.  Thereafter, there is a “Sunset Provision,” which means that on December 31, 2012, the estate tax provisions in effect for 2011 and 2012 will expire, and on January 1, 2013, the estate tax exclusion will revert back to a $1 million exclusion with all assets exceeding $1 million being subject to a 55% tax.
Whether this reversion will actually happen is unknown, because the present Congress has stated that it will re-visit what will actually happen to the estate tax in 2013.  We at Maroney Associates believe that one of four things will happen on or before January 1, 2013:
  1. The Sunset Provision will apply and the estate tax will revert to a $1 million exclusion with assets exceeding the excluded amount being taxed at 55%;
  2. The 2011 and 2012 limits will be extended, meaning that the exclusion will remain at $5 million with assets exceeding that amount being subject to a 35% tax;
  3. A political compromise may be had, with the exclusion amount being lowered to approximately $3.5 million but the tax rate being set at approximately 45%; or
  4. There may be a total repeal of the Federal Estate Tax.
Many political pundits predict that if the Republicans maintain the present majority position they took in Congress during the 2010 mid-term elections, and if they also take a majority control over the U.S. Senate and possibly the U.S. Presidency in the 2012 elections, there is a significant likelihood of there being a total repeal of the federal estate tax in 2013.  This means that as of January 1, 2013, there would be no federal estate tax.
For the present time, there is a major tax benefit relative to the use of the unlimited marital deduction.  There is also a benefit for those whose assets exceed $5 million and/or couples whose assets exceed $10 million, to use the marital/credit shelter trust rules.
The federal estate tax exclusion is the amount a person can have in their estate without having the estate owe a federal estate tax.  Critical for any married couple is the knowledge that an unlimited amount of property may be left to a surviving spouse without him or her incurring any federal estate tax.  This is certainly a good financial argument for marriage,  however, without proper planning, the property left in the surviving spouse’s estate will be subject to federal estate and gift taxation upon the surviving spouse’s death.
For example, without proper planning through the use of the marital/credit shelter trust, the surviving spouse who receives an inheritance in an amount in excess of $5 million,  will have lost the opportunity to shield the $5 million from the estate of the deceased spouse and may cause the estate to become taxable upon his or her own death.
With proper planning, namely the use of a credit shelter trust, each spouse can enjoy his or her own $5 million exclusion, thus leaving up to $10 million without paying an estate tax.

Based in Melville and Garden City, New York, the attorneys at the Law Offices of Maroney Associates, PLLC assist clients throughout Nassau County, Suffolk County, Queens, and the cities of Mineola, Hempstead, New Hyde Park, Franklin Square, Williston Park, Queens Village, Melville, Huntington, Farmingdale, Patchogue and Uniondale, NY.

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