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There may or may not be an estate tax in 2010

It's Your Money

Posted: December 30, 2009 9:18 p.m.
Updated: December 31, 2009 4:55 a.m.
 
The federal estate tax (also commonly referred to as the death tax) is assessed on the value of all assets owned by a person when he or she passes away.

Assets passing to a surviving spouse are generally exempt from the tax.

Assets under a certain value (currently $3.5 million) also are excluded from the estate tax.

The federal estate tax was first enacted in 1916 and has been levied in various forms ever since.

Under the current federal estate tax law, which was enacted in 2001, the federal estate tax will be repealed tomorrow.

This means that for the first time since 1916, no federal estate tax would be imposed on the estate of anyone dying in 2010, regardless of the value of the estate.

However, the current law expires at the end of 2010 and the previous law would be reinstated.

This would revive the federal estate tax in 2011 for any estate over $1 million with a potential maximum tax rate of 55 percent.

The current law imposed a 45 percent tax on estates of more than $3.5 million in 2009.

Another change in the law that is rarely discussed would result in a loss of step-up in basis for appreciated assets inherited in 2010.

For years I have been telling my clients Congress would almost certainly pass a new law before 2010 which would extend the estate tax and set new exemption amounts.

The current Congress has consistently suggested it would not allow the estate tax to expire and would enact new legislation before the repeal of the tax.

The Wall Street Journal reported on Jan. 12, 2009 that the president and congressional leaders had announced their intent to act quickly to prevent repeal of the estate tax.

On Dec. 3, the House finally passed a bill which, if approved by the Senate, would permanently (or until Congress changes it again) set the estate tax rate at 45 percent and the exemption at $3.5 million.

The Senate was consumed by the health care overhaul debate and did not take up the estate tax issue before the end-of-the-year recess.

Some House members attempted to draft legislation that would be attached to another bill to temporarily extend the estate tax but that last-ditch effort failed, which reportedly surprised those on both sides of the debate.

The expiration of the estate tax sets up an interesting battle in Congress between the minority who favor permanent repeal of the estate tax and the majority leaders who have vowed to restore the tax and apply it retroactively in 2010.

The constitutionality of retroactive application of any new law could be another battle that Congress would have avoided by addressing the estate tax problem earlier.

Some commentators have expressed outrage at the inability of our elected officials to resolve this problem given the fact Congress has known for eight years this was an issue that had to be addressed.

There has been speculation that some people have actually attempted to extend the life of a family member who might die before the end of the year due to possible tax advantages.

Randall D. Armour is an attorney and licensed real estate broker. "It's Your Money" appears Thursdays and rotates between a handful of the valley's financial professionals. His column reflects his own views and not necessarily those of The Signal.

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