Federal Estate Tax Repealed for 2010

You may have read about the repeal of the estate tax. What happened on January 1, 2010? How does this repeal affect you and your charitable giving?

First, what is the “Federal Estate Tax”? In the US, when people die with a certain amount of assets, their estates must pay a tax for the privilege of giving those assets to other people. Many states also have estate or inheritance taxes.

Here’s the short version of what happened, in plain English:

A law was passed in 2001 that gradually decreased the federal estate tax through 2009. That law stipulated that if no future laws were passed – and professionals in the field all expected that Congress would pass a new law in those intervening 9 years – the federal estate tax would go away in 2010, and return to much higher levels in 2011.

Because of this, at the moment there is no federal estate tax. 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 leave estates that are not subject to federal estate tax. Congress might pass a new law to tax people who die during the rest of the year, might try to make the law retroactive on people who died earlier in the year, might not pass any estate tax law this year, or might not pass any estate tax law next year. Anybody’s guess is just that – a guess.

Important Points to Consider:

We think that waiting to do anything until after a new tax law passes may be the wrong approach to take. Here are a few things to consider:

1. The federal estate tax did not change for anyone with an estate of less than $3.5 million, or for couples with good planning and total estates worth less than $7 million. So if your estate is smaller than that, there’s no excuse to wait until Congress fixes the tax rates. (If Congress does nothing, the estate tax will apply to any estate of more than $1,000,000 starting January 1, 2011.)
2. The repeal of the federal estate tax only impacts large estates left by people who die while it is repealed. If Congress passes a law that is retroactive, the repeal may not help any estates. But whether or not you die in that window, you need a good will.
3. Some related changes in 2010 might require people who inherit property to pay more capital gains taxes when they sell it, unless Congress passes a new law. So people with smaller estates might have an extra reason to review their estate plans now.
4. Everyone needs a will, so the current estate tax “gap” should not be an excuse 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 based on an arbitrary one-size-fits-all formula.
5. People who have estate plans that were written before the end of 2009, should make sure their plans are up-to-date based on current law, and not just for estate tax reasons. January 1, 2010 may have been one of those “major life events” that call for a careful review of your plans by a competent professional. For example, a will provision which 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.
6. The repeal of the federal estate tax may have an impact on estate and inheritance taxes in your state. You may want to ask a professional to help you understand how state laws and taxes impact your estate plan.

the High Museum of Art has an important mission. Please consider supporting us through your gifts from your will and/or trust. Please mention your desire to make a gift when you visit with your attorney, and other financial or tax advisors, and consider bringing a copy of our sample bequest language.

Thank you for thinking about the impact a gift through your will can have through the work of the High Museum of Art. For more information, please contact us.