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Current Status of Potential Estate- and Gift-Tax Changes

Posted August 2009

It's August, and Congress has not made any appreciable movement with regard to estate and gift taxes, also referred to as transfer taxes. Why the urgency? If Congress does not change the law by the end of this year, federal transfer taxes will disappear for the year 2010—and anyone dying next year with any kind of an estate, even one valued in the billions of dollars, will not have to pay a penny in transfer taxes. Furthermore, many of you know that come 2011 the law will revert to the limits under 2001 tax legislation: a $1,000,000 exemption per person and a flat rate of 55%.

Considering the number of other major and massive legislative issues confronting Washington and the nation, it is not surprising that the transfer-tax problem has been pushed to the back burner. Nevertheless the prevailing consensus is that the issue will be settled, probably by December.

And what might we expect?

Again, the consensus wisdom is that Congress will keep the exemption and the rates where they currently are for 2009: a $3,500,000 exemption per person and a flat rate of 45%. This means that a married couple could shelter up to $7,000,000 from transfer taxes.

There is a very interesting proposal picking up steam as it weaves itself through Congress that is called "exemption portability." This portability would enable a surviving spouse to take advantage of and use any of the deceased spouse's unused exemption.

Example: Bob dies with an estate of $2,000,000. His executor uses $2,000,000 of Bob's $3,500,00 exemption to wipe out any estate tax on that amount. When Bob's wife, Vivian, dies a few years later with an estate of $5,000,000, her executor combines Vivian's $3,500,000 exemption with Bob's leftover $1,500,000 exemption to cancel the transfer tax on Vivian's $5,000,000.

Stay tuned to see how it turns out.