You may have heard that estate taxes are being eliminated, or that the amount of your estate tax exemption has increased. You may think that you don’t need to worry about estate taxes any more. Baloney. The reality is that the government has adopted an approach to estate taxes that only a politician could consider sane. Here’s how it works.
It is true that the amount of your exemption from federal estate tax increased to $2 million as of January 1, 2006. This means that the first $2 million in your estate will escape estate taxation. In addition, the maximum tax rate imposed upon estates above the excluded amount has fallen from 49% in 2003 to 46% in 2006, with a minimum tax rate of 45%.
The exclusion (called your “unified credit”) will climb to $3.5 million in 2009. In 2010, the estate tax will be suspended entirely, but will be replaced in part by a new capital gains tax. However, and this is the part that makes no sense, in 2011 both the estate tax exclusion and rates will rise from the dead. The exclusion will revert to $1 million and the maximum rate will return to 55%.
The net effect of this nonsensical estate tax scheme is that unless you know that you will die before January 1, 2011 you must plan on your exemption from estate tax being $1 million, and the tax rate on assets above that amount being roughly 50%. This means that married couples with combined assets in excess of $1 million will pay hefty estate taxes unless they set up trust based estate plans. Don’t let the fanfare about estate tax repeal fool you. In spite of the smoke and mirrors, estate taxes are alive and well and waiting for you.