Beginning in 1916, the federal government began taxing the estates of those who died each year. Without more, people could on their deathbed give away their entire estate by gift, thus evading the estate tax. So, the next move was to tax gifts made during life – this was added to the tax structure in the 1930’s. At the higher estate levels subject to these taxes, the next planning device was to make gifts that skipped a generation or two. Gifts of accumulated wealth to a grandchild or great-grandchild moved the wealth past one or two generations without taxation. So that hole in the system was plugged with the generation skipping transfer tax – which then taxed those transfers which otherwise would have skipped a generation or two of estate taxes. By 2001, the three-legged system applied to estates over $1 million, and applied a highest tax rate of 55% to those estates.
In 2001 Congress enacted changes to the estate tax: they gradually raised the exemption amount from $1 million to $3.5 million, and lowered the highest tax rate to 45%. In 2010, the estate tax (but not the gift tax) was eliminated entirely. In 2011, the system that was in place in 2001 was scheduled to return unless Congress acted. In the last days of the lame duck Congress, they finally acted, and so the estate tax is back. For estates of those dying in 2011 and beyond, if you have an estate of over $5 million, then you will pay estate tax that reaches a top rate of 35%. Below that amount, there is no federal estate tax due. (But remember that you are not home free in that circumstance, as many states still have an estate or inheritance tax in place.)
In 2001, the total federal estate tax returns filed were 108,071, of which 51,736 were taxable. In 2009, the total returns filed were 33,515, of which 14,713 were taxable. According to the New York Times, “less than one-half of 1 percent of people who die in 2011 will be hit by the estate tax.” Clearly, fewer estates are being taxed because of the higher exemption rates. However, the change is not yet permanent: Congress has kicked the can two years down the road. In 2013, the 2001 rates and levels will arise from the dead, unless Congress acts again. Will they act in 2012? That’s a presidential election year, and so it is more likely that they will not act, and we will again be playing chicken with the estate tax after the 2012 election. But, we have some certainty for the next two years, and those to whom the revised estate tax law may apply can now plan accordingly. For the rest of us, the estate tax is a non-issue for the next two years. But keep your eye on that can!
©2011 Douglas P. Humes
Posts
No comments:
Post a Comment