Federal Estate Tax Repealed in 2010
What this Means to You and Your Estate Planning
You may have read about the repeal of the estate tax on January 1, 2010. You may have been wondering what it means, and how the repeal affects you and your estate.
Here is a basic explanation, in plain English. Unfortunately, even plain English can’t greatly simplify US tax law! But we can provide an outline for understanding the situation, and point out some issues of concern.
First, what is the “federal estate tax”? In the US, when a citizen dies with a certain amount of assets, their estates must pay a tax for the privilege of giving those assets to other people. It is also sometimes referred to as an “inheritance tax.” Many states impose such taxes as well.
In 2001, a law was passed that gradually decreased the federal estate tax through 2009. The law further stipulated that if no future estate tax laws were passed – and professionals in the field all expected that Congress would pass such new laws in those intervening 9 years – the federal estate tax would go away in 2010. It would be repealed for that year. But it would return in 2011 at much higher levels.
That is why at this moment there is no federal estate tax. And therefore people with large estates who die between January 1, 2010 and the date of any new estate tax law might or might not be able to pass on their estates free of federal inheritance tax.
Why “might or might not”? The reasons for this ambiguity are:
- Congress might pass a new law to tax people who die during the rest of 2010;
- It might try to make the law retroactive on people who died earlier in 2010;
- It might not pass any estate tax law this year.
It’s anybody’s guess as to what precisely will happen.
We think, however, that waiting to do your estate planning until after a new tax law passes is not a prudent strategy. Here are a few things to consider:
- This federal estate tax legislation will not affect individuals with estates of less than $3.5 million, or couples with good planning and total estates worth less than $7 million. So if your estate is smaller than that, there’s no reason to wait for Congress to do anything. (If Congress does nothing this year, the estate tax will apply only to estates greater than $1,000,000, starting January 1, 2011.)
- The repeal of the federal estate tax only impacts large estates left by people who pass away while the repeal is in effect. If Congress passes a law that is retroactive, the temporary repeal may not benefit any estates. But this year’s uncertainty should not motivate anyone to delay something as important – to themselves and institutions they love – as the preparation of a well-structured will.
- Everyone needs a will, so this current estate tax “hiccup” is not a reason to avoid putting a well-drafted will in place. If you don’t make your wishes known through your will, the state will make all the decisions for you based on arbitrary, one-size-fits-all formulas. Who needs that?
- If Congress does nothing about estate taxes in 2010, other related laws kick in that could require people who inherit property to pay more capital gains taxes when they sell it. This is a good reason for people with smaller estates to review their estate plans now.
- People whose estate plans were written before the end of 2009 (that is, pre-estate tax repeal), should make sure their plans are up-to-date based on current law. And not just for estate tax reasons. For example, under current law, a will provision that leaves “the amount exempt from federal estate tax” to children could result in leaving less to your spouse or more to children than you intended.
- The repeal of the federal estate tax may impact the estate and inheritance taxes of your state – another good reason to ask a professional to help you review your plan.
We hope this information will help you make better decisions for yourself and your loved ones. We also hope you will consider supporting Arcadia in its important mission through gifts from your will and/or trust. We hope you will mention your wish to make a gift when you visit with your attorney, and other financial or tax advisors. To simplify the process, consider bringing a copy of our sample gift language for your will or trust to your planning meetings.
Thank you for thinking about the impact a gift through your will can have through the work of Arcadia University. For more information, please contact us.
